How Accounts Grow With Compound Interest

Written by: Jennifer Watkins
12/20/2019

compounding

Managing finances begins with learning all about compound interest and how it makes you more money. Investments and savings grow larger over time from the interest rate compounding the money deposited into the account. If you deposited $10,000 for a year at a 5 percent interest rate, your money would earn an additional $500.

This is what compounding is all about. It will continue earning interest on the original amount you deposited plus the money you made in interest already. This is how money grows more money. As long as you continue investing, the cycle will continue to grow more wealth. Many people do this to become financially secure.

Disadvantages Of Compounding

Borrowing money with loans is never recommended for individuals trying to build wealth. Compounding will work against you. Some people think that borrowing money is a good way to have cash for investments. In reality, this is one of the worst things to do. Unless you keep the loan payments paid on time each month, the interest will continue to build upon the amount of the loan.

It can be similar to using credit cards. A credit card is just a loan issued to you by a company that makes money back through compound interest and other fees. You take on enough debt through the use of credit cards; you will find yourself in financial trouble. A wise choice is to forgo the use of credit cards.

When you borrow money through a loan, interest will continue until the amount is paid off. More interest will be compounded to the original loan plus what is already added. By paying more than the minimum amount each month, you can reduce the negative effects of compounding.

Making Compound Interest Work For You

Saving and investing your money over time is a great way to build financial wealth. The more money that you can squirrel away just continues the compounding process. Money put away into investments should be left alone. Think long-term and use patience.

Higher interest rates make accounts grow larger over time. Accounts that compound daily are a better option when looking for a way to make more money from investments. Avoid withdrawing money from the accounts if possible because it works against the compounding effect. In fact, adding deposits to the account will make compounding stronger.

How To Invest Money To Make It Grow

Remember that compounding helps your money grow. If you had an initial investment of $5,000 at a 7 percent annual growth rate over 20 years, saved an additional $200 each month, your total value on the account would be $124,379. The interest you would earn would be a whopping $71,379. This is the power of compounding over time.

Learning where to put investments to make money is a challenging process. With so many options available, it pays off to do your homework in selecting what is the right plan for you. Purchasing mutual funds is good for individuals to get started with investing. Buying funds directly from a company like Fidelity saves you money on trade commissions.

Government bonds are a safe option for people who want low-risk options to invest their money. Since these bonds are considered low-growth, they won’t make people the kind of profits they can acquire from other riskier alternatives.

Retirement accounts offer individuals great options for investing their money. A 401(K) is one of the best ways to build wealth for your future. The company you work for matches what you put into the account to a certain amount. The key to making the most of these plans is to save as much as you are allowed each week with your employer match. The great thing about the plan is that no money is taxed unless you have to withdraw from it before 60 years of age.

A Roth IRA is another plan useful to many individuals because the contributions can grow tax-free while they save. Withdrawals at retirement are also tax-free under certain conditions. A company like Personal Capital could be a good choice when thinking about starting an IRA.

Determining Investment Goals

Think about how and why you want to invest your money? Do you want to invest in long-term or short-term goals? You might just want to invest money to build up a nest egg for the purpose of having a down payment for a new home. You may want to invest in retirement planning.

Investing money comes with risk. You need to think about if you’re willing to gamble with the chance of losing cash by investing in higher-risk options. Stocks and stock funds can make you enormous amounts of profits over time. If you are willing to take chances, a portfolio rich with stocks is a great way to make money.

Asset allocation is where you put money into a variety of stock and bond funds in a portfolio. It is a safer alternative for people who don’t want to put all their money in one basket such as stocks. The stock market always has fluctuations from year to year. This is why they use the reference to the market as a bull or bear market.

When you’re investing money into any type of plan or portfolio, make sure you use wisdom to select the right options. Never invest money that you need for personal finances each month. Use only the money that you can safely do without.


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How Accounts Grow With Compound Interest

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