The Power of Compound Interest

Albert Einstein reputedly said that compound interest is “The Eighth Wonder of the World” or “The Most Powerful Force in the Universe”. No one really knows if Einstein said those exact words, but why did he like compound interest so much? And why should you start investing today?

To answer those questions, let’s explore the “The Power of Compound Interest.”

You can think of compound interest like a snowball rolling down a mountain accumulating more and more snow as it rolls downward. At first the snowball is very small, but over time it grows and grows until it is very large. Compound interest will help you save for a downpayment on a house, children’s college expenses, your retirement or any other goal you may have.

I was introduced to compounding and how it can make money grow at an early age. An adult asked me a question that maybe you’ve heard before. “Would you prefer to receive $1,000,000 today or a penny that doubles every day for a month (31 days)?” The trap was set and I fell right in. Of course I’d take $1,000,000 today over that measly old penny. I should have done my homework. You see, if you take $0.01 and double it each day for the remaining 30 days, you’ll end up with $10,737,418.24. Not bad for having to wait just one month.

Are you likely to be offered such a deal? Probably not quite that good, but in the investment world, you’re offered the ability to compound your savings each and every day. Compound interest is simply investing your money in a savings account, mutual fund, bank CD or other instrument and allowing the interest (or dividends) to stay in the account and earn more interest on top of the original interest. If you continue to leave your interest payments in the account, you’ll keep earning more and more interest on your interest…. or compound interest. In other words, you get paid for leaving your earnings in the account.

The higher the rate of return and the longer you leave the earnings accumulate, the faster your balance will grow. You can use the “Rule of 72” to estimate how long it will take for an investment to double. The Rule of 72 works like this: Divide 72 by the estimated rate of return and the answer will be the approximate number of years it will take for your investment to double. For instance, if you expect to earn 6%, it will take about 12 years (72 ÷ 6 = 12) for your investment to double.
One more thing, if you really want to make your savings grow, you can make regular monthly deposits to speed things up. Even a small amount can make a big difference. Let’s say you start your savings account with $1,000 and you’re earning 3% interest. Left untouched, you’ll have $1,344 after 10 years. If you worked on a budget and set aside $25 per month in the savings account in addition to the initial $1,000 deposit, you’d end up with $4,877 at the end of 10 years.

Hopefully, you can now you can see the “Power of Compound Interest” and why starting your savings plan today is so important to reaching your savings goals. At Frontier Bank, we want to help you reach your goals and offer a wide variety of products and services to help you along the way. Our Big Deal Checking and Savings accounts are a great way to get started. We also have a Wealth Management and Trust team that can assist you with non-bank investment products.

Are you ready to get the conversation started about reaching your goals?

I invite you to give us a call, we are here to help!

Scott Schneidermann
President + CEO