When it comes to saving money, compound interest is the interest you earn on not only your initial contribution, but the interest earned on that initial contribution as well. It’s essentially a snowball effect. For example, let’s say you contributed $1,000 to a savings account that earns 5% annual interest. After one year, you’d earn $50, giving you a new balance of $1,050. In year two, you would earn 5% on the larger balance of $1,050 instead of the original $1,000. Your money has compounded and will continue to grow at an increasing rate each year.
There are also many investment vehicles available that can help you make the most of compound interest. One of the simplest starting points for building retirement savings is to contribute to your employer’s 401(k) plan if one is offered. It is an employer-sponsored, tax-advantaged retirement savings account. Alternatively, you can contribute to an IRA, which is an account set up at a financial institution that allows you to save for retirement with tax-free growth or on a tax-deferred basis. However, a simple savings account can help you prepare for the future. No matter how you choose to start saving, the important step is to start contributing as early as you can to take full advantage of compound interest.
Start saving for your future now. The earlier you start, the better. What if you can’t save away $5,000 a year, though? Save away whatever you can. $1,000…$500…$100. Whatever it may be, it’s never too early to start taking advantage of compound interest and setting yourself up for a healthy financial future.
