7 Things You Should Know about Compound Interest

Thursday, September 25, 2014, 1:00 AM | Leave Comment

If you have heard that compounding interest can work in your favor to help you reach your investment and savings goals, you may be wondering exactly how it works. Whether you open an account with PenFinancial Credit Union or another financial institution, it is important that you understand more fully how compound interest works and how effective it can be in promoting your financial interests.

7 Things You Should Know about Compound Interest

  1. You Can Earn Interest on Your Interest

    Compounding interest essentially means that you are earning interest on interest deposited into your account. Consider when you first open an account, you will receive an initial interest deposit based on the original amount you deposited in the account. However, the second and subsequent interest deposits will be based on the balance plus previous interest deposits.

  2. Time Is on Your Side

    Because you can earn interest on your interest, you can see that time is on your side. The longer your account is opened and generating interest for you, the more powerful your results from compound interest can be.

  3. It Is Best to Start Saving What You Can Today

    Because time is on your side, it is best to start saving as soon as possible. Even if you only have a few dollars available to deposit into a savings account today, this is better than nothing. Consider that the money you deposit today could generate compounded interest deposits for you for years to come. This means that the money will grow more significantly if you deposit the funds into an account today.

  4. Saving a Little Now Is Better than Saving a Lot Later

    The power of compound interest is considerable. You may be thinking about making a larger deposit later in the year, but it is better to make smaller, periodic deposits over time than a single large deposit later. This is because your smaller deposits will generate interest and compound interest over that period of time.

  5. Small Deposits Can Be Helpful

    Some consumers believe that they do not have enough money to save, but the fact is that saving even $10 or $20 per paycheck will add up over time. Your own addition to the principal balance will be combined with compounding interest, and you will see that your account balance will continue to increase over time.

  6. Even a Small Increase in Interest Rate Is Beneficial

    A very small increase in your interest rate may only yield a few cents extra in interest charges initially if you have a small account balance. However, because compound interest builds over time, even a small increase in the interest rate can be truly beneficial to you.

  7. There Are Different Types of Compounding Interest

    You should be aware that interest can be applied to your account in different ways. For example, it can be applied based on the average daily balance or the balance on a certain day each month. Furthermore, it can be applied weekly, monthly or even quarterly. These differences can impact how your funds grow, so it is important to pay attention to this factor.

Compound interest can work in your favor, but you have to deposit your funds into an interest-bearing account to get started. If you do not already have an account, take time to open one today. 

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