Today’s topic? Compound interest. But first, let me introduce myself.
Hi! I am a mom focusing on inspiring those who are ages 30 and under. I want my child and you to have a life moving toward financial understanding starting at an early age so that you can have the best life possible.
Money is a tool to help you have the best life possible. It gives you power to pay for your needs, and as yours grows, it allows you the ability to pay for your wants. As your money continues to grow, it allows you the ability to pay for more wants.
As you improve your financial literacy, you need to grow your knowledge of financial terms.
So, let’s dive into our first question…
What is simple interest?
Simple interest is the money that is paid for allowing someone to hold and use your money when it is paid at a flat rate. In other words, the interest is paid on the principal that you deposit, not on any interest that builds up.
What is an example of simple interest?
Here is an example of simple interest:
If you borrowed $100, and the interest rate on the loan were 10%, the interest that you would have to pay would be $10. You calculate that like this: $100 X .10 = $10.
Now…
What is compound interest?
Compound interest is when the original money being held (the principal) earns interest, and then the next time that interest is paid, interest is paid on the principal (which you would have left in the account) plus the previously earned interest. The next time interest is paid, the interest would be paid on the principal, plus the two previous eaarnings. This pattern continues, which means that the interest is being paid on interest. In effect, interest is being paid on more and more money. So, the interest is compounding.
Why is compound interest better?
Compound interest is better than simple interest because it makes more money faster than simple interest. Put another way, it grows your money faster. It does that because is interest paid not only on the principal but interest paid on previous interest, too.
When is compound interest good?
It is good when interest is compounded when you are the receiver of that interest. So, when you receive it on something like a high-yield savings account, or on bonds, it’s good for you. It is bad when you have to pay it. This is like when you pay interest on a loan or a credit card.
What did Albert Einstein say about investing?
Reportedly, Albert Einstein called compound interest the eighth wonder of the world.
When is simple interest better than compound interest?
Simple interest is better than interest that is compounded when you are borrowing money.
It’s the reverse when you are depositing and investing money.
Are compound interest accounts safe?
All investments have their risks, and various investments have various amounts of risk. Compound interest works for both guaranteed and non-guaranteed investments.
How can I earn compound interest?
You can earn it in a variety of ways.
Looking for ways to earn interest that is compounded? Try:
- High-yield Savings Account
- Money Market Funds
- Bonds
- Bond Funds
- ETFs
- Dividend Stocks
What is the easiest way to earn compound interest?
Perhaps the simplest way to earn compound interest is to open a high-yield savings account.
Which investments pay compound interest?
- High-yield savings accounts
- Dividend stocks
- REITS
- Bonds
- Bond Fonds
- ETFs
- Money Market Accounts
Which is better? Compounded monthly or annually?
For a given rate, it is better to receive interest compounded monthly rather than annually. So, if you receive 4% interest compounded monthly, it is better than 4% compounded annually.
However, interest rates for annual compounding are ofen higher than interest rates compounded monthly.
Does a 401K get compound interest?
Yes. How frequently depends on the specific account. It could happen daily, monthly, or annually.
What type of interest earns you more money?
Compound interest earns you more money than simple interest. This is because, not only is interest paid on the principal (which is the money that you deposit), it is also paid on the previous interest paid, as long as you leave all of the money in the investment instrument.
How did Benjamin Franklin describe compound interest?
Benjamin Franklin described compound interest by saying, “Money makes money. And the money that money makes, makes money.”
Benjamin Franklin demonstrated his belief in this powerful method of growing money by leaving the equivalent of $4000 each to Pennsylvania and Massachusetts. The money could not be fully accessed for 200 years. When the money could be fully accessed, Pennsylvania’s money had grown to $2 million, and Massachustt’s money had grown to $4.5 million.
Key Takeaways
- Compound interest is interest paid on the principal plus any previous earnings.
- It grows your money faster than simple interest.
- Compound interest is good when you receive it.
- It is bad when you have to pay it.
- Simple interest is better than interest that is compounded if you have to pay interest.
- The easiest way to start earning compound interest is to put money into a high-yield savings account.
- For a given rate, it is better to receive interest that is compounded monthly than interest that is compounded annually.
- Some ways to earn compound interest is to invest in any of the following instruments: High-yield Savings Account, Money Market Funds, Bonds, Bond Funds, ETFs, and Dividend Stocks.
- 401Ks compound interest. The specific 401K account determines how frequently it compounds.
- Albert Einstein called compound interest the eighth wonder of the world.
- Benjamin Franklin described compound interest by saying, “Money makes money. And the money that money makes, makes money.
Do you want to read more of a mom’s letters written to inspire financial independence by age 30? Check out:
Earn As Much Interest as Possible
Wondering About Rich Mom?
My name is Valerie, aka “Rich Mom.” Rich Mom Answers is a segment of the Rich Mom, Poor Kid blog that started as a way to give short answers to my daughter’s personal finance queries. My goal in these posts is to teach the vocabulary of financial literacy.
Specifically, I started sharing these bits of financial information in order to encourage my daughter (aka Poor Kid), because I want her to get better with her finances.
Although I originally started this blog for my daughter, I decided that I wanted to share them with others, like you.
The intended audience is people age 30 and under or financial literacy beginners.
If you like the financial literacy information that I have provided, I ask you to do two things:
1) If you know someone who might find this information useful, please forward a link to this post to that person.
2) Please subscribe to and follow this blog. It inspires me to keep writing.
Please Note: I am not a financial advisor. Please do your own research and check with your own financial advisors before making any investments. I share information only as a means of encouragement to look further into improving your finances.
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