The Power of Interest

Interest, a word you hear an awful lot these days, is usually used in reference to debt. No doubt about it, debt that carries any amount of interest will delay your long-term financial goals and should be taken seriously. However, this article will address the positive aspects of interest, specifically compound interest and how much you stand to gain by taking advantage of this powerful formula.

Making your money work for you

Are you working for your money, or is your money working for you? If your money isn't working for you, it's about time that it does by putting it into an investment instrument which has a compounding interest structure.

Start early

The younger you start, the more time compounding has to work in your favor, and the wealthier you can become. Even if your twenties and thirties have passed, it's still not too late to take advantage of compound interest. The next best thing to starting early is starting now.

A little goes a long way

Even if you don't have much to invest, take what you can spare and start an interest-bearing account. A regular savings account at your bank is a good and safe place to keep savings, but the rate of return barely keeps up with inflation. It is better to find a good mutual fund that has a higher rate of return. You typically need a certain amount to start the fund, but that can be as low as $50. Your money isn't as liquid should you need it, but you shouldn't be liquidating anyway. This money is meant to stay put for a while (possibly even decades) to allow compounding to go to work.

Be patient

Do not touch the money; compounding only works if you allow your investment to grow. The results will seem slow at first, but persevere. Most of the magic of compounding returns comes at the very end. When you receive account statements, don't focus on the incremental increases. Instead, focus on the end result, trusting the tried and true process of compounding. Eventually your statement will reflect an enormous balance which required very little effort on your part. You'll be grateful for your patience.

Make regular investments

This step isn't required for compounding to generate a good return. Some people make an original investment, nothing more, and just allow that to grow. However, if you want to maximize your contributions, add more to the account whenever you can. Your discipline will pay off, exponentially.

Tax-free accounts

If you invest or save in a regular, taxable account, Uncle Sam will want his share. So make sure you factor that into your saving goal. However, you can invest in tax-sheltered accounts and keep more of the money to yourself. A Roth IRA is a great option because all of your earnings will be tax-free when you are retired.

Inflation

True, $1 million won't have the same purchasing power in 40 years as it has today, but that's all the more reason to start saving now. Consider also that, over the years, your income will rise as well. If you increase your savings with each increase in your pay, you'll give your money more fuel to compound, and you'll certainly boost your spending power down the road.

Besides, having a million bucks in 40 years is better than not having a million bucks at all. Start as soon as you can and save what you can to let compounding work its magic.