Money That “Works for You”: What to Know About Compound Interest

Hand makes five stacks of sequentially growing coins. Represents growing investment.

 

When you were a kid, did you ever save quarters in a jar? Or set aside a portion of your allowance in a piggy bank for a big purchase, like a bicycle, a pair of designer shoes, or anything that mom said “no” to buying?

As useful as those tools are for teaching good budgeting habits, the reality of saving money – and making the most of your financial potential – is more complicated. That’s mainly because of interest, or the money you earn when you deposit funds into a savings account or purchase an investment.

For example, let’s say you deposit $100 into an account offering 5% (it’s an easy, whole number to use for the purpose of this explanation) interest, compounded annually. By the end of the first year, you’ll have earned $5 (that is, 5% of $100) in interest, giving you a total balance of $105.

But that’s just the beginning. The next year, you’ll generate interest on the total balance of $105 (not just the initial deposit of $100), earning you $5.25. As the process repeats year after year, the interest will continue to multiply.

Interest is an essential tool in your financial portfolio. But what’s the best way to make your money work for you?

  • Don’t wait to get started. Compound interest becomes more and more powerful the longer your money stays in an account. That’s why – even if you “don’t have much to save” – it’s still better to get started now rather than later. The sooner you start saving, the more your money can increase in value.
  • Don’t dip into your savings. Making withdrawals isn’t just a matter of pulling a dollar here and there – it also puts a dent in your earning potential. What if you withdrew just $5 a year from your compound interest account?

    It might not seem like it would have a big impact, but no matter how many years you left your money in that account, you’d never have more than $100. That’s why the best way to let your money work for you is to leave it alone.

  • Contribute where you can. Building upon compound interest doesn’t happen overnight, but if you’re able to contribute even a small amount on a regular basis, you’ll see growth in your personal wealth. Let’s say that, in addition to your $100 deposit, you add $5 to your account each month. Over the course of 50 years – with compound interest – your balance would grow to more than $13,700!

No matter how small the amount, good saving and spending habits add up over time. At Axiom Bank, we’re here to help our customers achieve their financial goals through smart planning and a range of convenient online and mobile banking tools.

If you’re interested in a simpler approach to banking – and frank conversations with financial experts you can trust – connect with Axiom Bank today.