Compound interest rates can be referred to as an Annual Percentage Rate, Effective Annual Rate or Effective Interest Rate. Of course, our saving account are not the only places we see compound interest at work. It cuts both ways; compound interest is also charged on loans. When you borrow money for a house, car or whatever, you'll notice that the amount of interest you have to pay at first is really high. In fact you pay off more interest than principal.
Gradually that comes down and you begin to see light at the end of the tunnel. You start to pay more off the principal and that brings your total interest down more. Meanwhile the financial institution from whom you borrowed is smiling all the way to their bank.
But to get back to that savings account earning compound interest for you. The longer you hold a savings account, the more interest you will get on it because you keep getting more interest paid on your interest all the time, like a tier effect. So sticking with a savings account is a good and very safe way to invest your money. You could get a higher return on some other types of investments, but there may be more risk attached to them.
Showing posts with label compound interest. Show all posts
Showing posts with label compound interest. Show all posts
Thursday, August 28, 2008
What is Compound Interest?
Most of us have heard of interest. That's what you have to pay when you get a loan. That's what makes it so hard to pay back the loan when the interest rates keep on rising! Ah yes, and that's the measly little bit of extra money the bank gives - grudgingly, it appears - when we have a few bucks saved up. But wait! It's not as bad as it seems.
Those two magic words "compound interest" that Einstein referred to as the world's greatest discovery are put to work for us when we have a savings account. But those of us who have just a few hundred dollars don't seem to notice it all that much. That's because it shows up better on larger amounts - and if you don't keep withdrawing. These days most high interest savings accounts work on compound interest.
The interest that you earn on your $100 may not seem much, but it is added to the balance, and then in the second year interest is paid on that total, rather than just on your original $100. So you are basically getting interest paid on your interest or if you have a managed fund then it is the dividend reinvested. When this keeps on every year - as it does, so long as your keep your savings account going, then that total really begins to add up.
Those two magic words "compound interest" that Einstein referred to as the world's greatest discovery are put to work for us when we have a savings account. But those of us who have just a few hundred dollars don't seem to notice it all that much. That's because it shows up better on larger amounts - and if you don't keep withdrawing. These days most high interest savings accounts work on compound interest.
The interest that you earn on your $100 may not seem much, but it is added to the balance, and then in the second year interest is paid on that total, rather than just on your original $100. So you are basically getting interest paid on your interest or if you have a managed fund then it is the dividend reinvested. When this keeps on every year - as it does, so long as your keep your savings account going, then that total really begins to add up.
Subscribe to:
Posts (Atom)