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Compound Interest: Making the most of your money! - Sunday, September 01, 2013
When it comes to money and saving, we want to know more; specifically how to make and keep more.  Making a savings plan that works for you is about stashing your cash in the right places; so how do you know if you’re on the right track?  Look for accounts that have compound interest and you’ll be well on your way to making your money work for you! 

What is interest?
This is the price paid for borrowing money.  Consumers pay interest, known as Annual Percentage Rate or APR, when borrowing money (credit cards, cars, house).  Consumers can earn interest, known as Annual Percentage Yield or APY, on deposits in savings accounts, money market accounts, retirement accounts, and even checking accounts.  When consumers invest money for retirement, they are counting on the interest their money earns to help build their nest egg.

What is the difference between simple interest and compound interest?
Simple interest is only calculated on the initial amount of money (the principal).  Compound interest is calculated on both the principal and the accumulated interest.   Simple interest is preferable when borrowing money and compound interest is ideal for saving.

Time is money:
The effects of compound interest are most apparent over time.  The sooner you start saving and the longer you can leave money in an account that compounds interest, the greater your return will grow.  When considering investment products look for ones which compound frequently.

Interest rate corresponds with risk!
The percentage rate your investment earns, or APY, is related to the amount of risk for your principal.  Insured investments will earn a lower rate of return (reflected as APY) because the money is safe.  Money invested in the stock market may earn a higher rate of return, but investors run the risk of losing some or all of their money if the market takes a downturn or crashes.

Rule of 72:
To estimate how long it will take to double your money, use the Rule of 72.  Divide 72 by the interest rate to estimate how many years it will take for your money to double at that rate (this doesn’t account for changes in rate over time).   Below is a representation of the amount of time it would take for your money to double at various percentage rates:
        1% - 72 years                4% - 18 years                7% - 10.3 years                10% - 7.2 years
        2% - 36 years                5% - 14 years                8% - 9.0 years                  11% - 6.5 years
        3% - 24 years                6% - 12 years                9% - 8.0 years                  12% - 6.0 years


How Neighbors can help:  Visit www.neighborsfcu.org/save to see all our savings products designed to fit your short and long term savings goal!

 

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