For those of us who aren't rolling in money, saving a portion of a paycheck is a chore. We know we should do it, but there are so many other fun things to do with our money.
Compound interest makes it much more enticing to save.
Not sure why compound interest should get you excited? Because it helps your money grow faster and go further than you probably ever expected. Here are three reasons it's the best thing since sliced bread.
1. It's not simple...it's better.
Saving money can seem complicated, which makes many people decide to put it off or not do it at all. Compound interest isn't confusing, but it IS different than simple interest. Simple interest is earned on money you deposit into a savings account. Compound interest is paid on your money PLUS the money your deposits have earned. Over time, it increases your savings faster than simple interest.
To better illustrate compound interest, imagine you have $1,000 in savings. If you earn 3 percent interest on your money annually, you would have $1,030 at the end of the year. If you leave that money alone and keep it invested at 3 percent, you will earn interest not only on your original $1,000 but also the $30 you made the previous year. This cycle will continue until you take money out of the account.
While this may not seem like a big boost to your savings, as your balance grows, so will your earnings. That is why you always hear financial advisors telling you to start saving for retirement as early as you can. The longer your savings benefits from compound interest, the greater your retirement accounts will be.
2. It encourages you to leave your savings alone.
We may do well at saving for several months, and then get tempted at the nice chunk of money sitting in our accounts, begging to be plunked down on a new car, clothes, or vacation. NO! Compound interest helps us avoid this mistake. Think of it this way: The longer cash is left in savings, the more time it has to multiply. The higher the balance, the more it grows. By not spending our savings, we start seeing our savings grow by leaps and bounds, which gives us incentive to not only not spend our nest egg but to add as much as we can to it.
3. It prompts you to start early.
The younger you are when you begin socking money away, the more your money grows. So do it now! By building up a solid savings account, you can benefit from compound interest much longer than someone who waits.
For example, if you save $1,000 a month for thirty years at just 2% interest, you will have almost half a million dollars! Review your budget and cut out a small percentage of income from regular expenses, and earmark it for savings. Set up that amount to be automatically deducted from your checking account every paycheck, otherwise, you might end up spending it.
If you are in your fifties and this point is making you feel worried, don't despair. You can benefit greatly from starting to save money at ANY AGE. Sure, it would be better to start young, but if you didn't, don't give up and think it's not going to make a difference. You will, however, need to try to save more each month to "catch up" to your goals. The good news is it's not impossible.
Remember, even though you will be entering retirement soon or already are retired, you will still enjoy the benefits of compound interest all through retirement. As people live longer nowadays, it’s important to keep compound interest working for you throughout your retirement, which may be 20 to 30 years!
We’re Here to Help!
Compound interest helps our savings accounts grow and flourish. The main thing to remember is that we need to start right now, this paycheck, and commit to a savings plan every month. The younger we are when we set up a savings plan, and the more we can carve out of our budget to squirrel away, the more financially secure we will be. And security is WAY BETTER than sliced bread.
If you have questions on finding the right accounts to help you start benefiting from compound interest, stop by or give us a call at (409) 899-3430.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
