Compound Interest Working for You

by Matthew Perry
(last updated February 21, 2009)

Compound interest—just the name sounds enticing. It makes me think of money and growing exponentially and—this is the best part—doing it on its own. Just imagine it: a sack of money that just gets heavier and heavier until you can't even carry it any more! Sound good? This very principal applies in real-world finances, although it may take a number of years to achieve the stunning results imagined above. Here's a quick definition of compound interest and some ways you can use it to your advantage.

Compound interest means that interest is collected not only on the principal (the money you deposit), it's also colleted on formerly paid interest. This means that if you leave your account untouched, it will collect more and more interest every year.

Think of it this way: an account with $10,000 in it that collects seven percent interest once a year will have a balance of $10,700 after one year. However, the same account with the same interest rate collected quarterly would have a balance of $10,718.59. The extra money ($18.59) may not seem like much, but with time that money adds up.

With that in mind, you can make compound interest work for you in several ways. First, when you're choosing an account, think about how often interest accrues. You'll earn more money with an account that pays interest every quarter than you will with one that only pays interest annually, and the good news is that few (if any) banks still compound as infrequently as quarterly; some do it monthly, weekly, or even daily. Be aware of how your bank works and when your account collects interest so that you can have the most money possible in your account before that time.

Finally, while you could simply leave your money to accumulate and forget about it, you'll collect more interest if you continually deposit money in your account—the larger your principal, the more interest you get.

Author Bio

Matthew Perry

MORE FROM MATTHEW

Forecasting Expenses

What does the future hold? It's hard to know for certain, but this tip can help you make some good predictions.

Discover More

Should You Refinance?

The rightness or wrongness of refinancing depends a lot on your specific situation. Here are two factors you can use to ...

Discover More

Saving for a Goal

For most people, the good life doesn't come all at once. You can save up for it, though. Here's how to do it.

Discover More
More Money Tips

Health Savings Plans

Ecclesiastes says that there's nothing new under the sun. That may be true, but Health Savings Plans are still an innovative ...

Discover More

Starting a Savings Account for Children

It is never too early to start saving for your child's education. It is also easy to open custodial savings accounts for ...

Discover More

Choosing a Savings Account

Different savings accounts flood the savings market. These mug shots of commonly seen account types can help you keep them ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 6Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is nine more than 9?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)