The Power of Compound Interest

Saving money is one important aspect of your personal finance life. One way to add to your savings is using the power of compound interest. When you have a savings account, it will earn interest each month based on the APR, annual percentage rate. You can figure your monthly interest by multiplying your APR by the balance of your account, then dividing that amount by 12. Each month this interest is added to your account and the larger your account gets the more interest you will earn.

Grow over time

Using the power of compound interest, your savings can continue to grow even if you discontinue depositing money to it. This is why it is important to start saving as early as you can and use the power of compound interest to grow your savings. The earlier you start saving means you, the less of your own money you will need to put away.

This is also important with retirement accounts. When you are young and just start working it may be difficult to consider putting away money that you will not be able to use for many years. But it is important to start saving as soon as you can your money has more time to grow. Even if you are older and don’t think it is worth starting to save and invest it is important to start. Any amount you can save is better than not saving anything.  You may be surprised how your savings can add up over time by putting away any amount you can and adding the power of compound interest.

Working against you

In the way that compound interest is a good thing when you are saving money, it can work against you if you have debt. When you carry credit card debt the interest on the remaining balance is added to your account each month based on your APR. Many companies suggest a minimum payment. If you pay the minimum amount due, in most cases it will amount to barely over the interest charges, so it will take many years to pay off your balance. If you continue to carry a balance, the items you charged will end up costing you many times the original cost when you consider the extra interest charges.

Compound interest is an important part of your financial life, it can either work for you or against you. The power of compounding is an important aspect of boosting your savings.