Compounding Interest Rates

Many people don’t understand the awesome power of compounding interest. Simply put, compounding interest is making more money with the interest gained from your investment. This way the total principle that you have in the account to gain interest goes up all the time. Even though the interest added is small amounts at a time, you are making more money as time goes by because of the interest made on the interest gained.

The longer you keep your money in the investment the more interest you will make. The higher the interest rate or APR will also net greater gains over lower interest rates or APRs.

Even if you can save as little as 100 dollars a month at a 7% APR you can build $14,507.87 over the course of 10 years. If you did not invest your money you would only have $12,000. Moreover if your investment stayed at a 7% rate of return for an additional 15 years the total of your investment would be $67,899.76 which is a not too shabby for a little retirement nest-egg!

To demonstrate the power of interest rates, we can take the same investment at 4% as opposed to 7%. At the end of a 25 year term the total investment is only worth $42,986.94, a mere 63% of the original amount of almost $68 thousand.

Interest rates are especially crucial when considering long term investments. Many people move their CDs around to get the best possible rate at all times. This is a normal practice and smart investors can make the highest margins possible with this technique. Keep up with the most current information to make informed decisions about your money. Don’t be lazy by keeping your money in a normal savings account if you don’t need access to it for months at a time.

Some banks will give you the option of holding the interest from your CD to the end of the term or depositing the interest monthly into another of your accounts (such as a savings account that you may have with that bank.) If you are offered this choice you should always take the monthly disbursements so you can compound this interest in your savings account.
Here’s a good interest calculator.