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Time is money: Compound Interest - Sunday, June 01, 2014
In an effort to save money, we want to see good return on our investments! For every dime we tuck away, we want to see additional returns. So how do we make the most of our cash-stashing efforts? Start early and leave it alone to grow, and then let compound interest work its magic!

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.

What is interest?
Interest 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. The more frequently the money compounds, the more return investors see on their funds.

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. There are various investment tools which allow investors to mitigate some risks but still earn good returns. An investment advisor can help you choose the plan to best fit your needs.

It adds up:
National Endowment for Financial Education (NEFE) put out a chart to show the effects of compound interest over time on a retirement account. If a person saves $2,000/year from the age of 18-27 (10 years only and then never added more savings to this money), they would have saved $20,000 of their own money. If it was saved in a compound interest account (at 7%APY) it would grow to $361,418 by age 65. The same investor who started saving at 31 and saved until they were 65 (35 years) in the same fund (at 7% APY) would have invested $70,000 of their own money and their investment would total $276,474! The lesson here is to start saving! Earlier is better- but itís never too late to start!




 

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