Chances are, you’ve heard the buzz about the incredible power of compound interest. Regardless of your financial situation, investing in an account with compound interest can benefit anyone. Even if you’re only investing for a short period, the earnings can really stack up over time. Take a moment to watch this quick video to help answer your questions and utilize the power of compound interest in your portfolio.
Transcript
Understanding the Power of Compound Interest
Hi, I’m Danny Clark, a wealth advisor at Solidarity Wealth. By now, you have probably heard about the power of compounding interest and may wonder how to incorporate it into your financial plan. Smart investors use the effects of compound interest and practice patience to make their money work for them, eventually creating sustainable wealth.
What Is Compound Interest?
Compound interest means earning interest on both the initial investment and the interest gained from the investment. This process allows your money to multiply at an accelerating rate, generating much more wealth than the original amount invested.
How Does Compound Interest Work?
If you invest $10,000.00 in an account earning compound interest at a rate of 10% annually, here’s what happens:
- After one year, your investment grows to $11,000.00.
- The next year, you earn 10% on $11,000.00, and so on.
- After five years, your investment grows to $16,105.00.
This compounding process can continue indefinitely, creating a sum far greater than the initial investment of $10,000.00.
Key Elements of Compound Interest
Interest Rate and Risk
A higher interest rate generates larger returns, but it’s essential to note that higher rates often come with greater risk.
Time and Patience
The longer you leave your money invested, the more wealth you can generate. Time is a crucial factor in maximizing the benefits of compounding interest.
Frequency of Compounding
The frequency of compounding plays a significant role in the growth of your investment. For example, interest compounded annually grows slower than interest compounded quarterly or monthly.
How Can We Help?
There are online resources, like the U.S. Securities and Exchange Commission’s Compound Interest Calculator, to help you calculate potential earnings. However, if you have questions or want to implement this strategy effectively, consulting with a wealth advisor may be your next best step.
At Solidarity Wealth, our mission is to provide clients with objective advice aligned with their values, so they can live life to the fullest. We would love to meet with you to discuss your goals and explore how to put compounding interest to work for you.