How interest is generated can impact your savings in a big way. If the interest is compounded you will end up earning much more money on your investment compared to an account that earns simple interest. There is only one thing you must do in order to earn money on a compound interest account-wait!
If a bank account produces simple interest it means that the interest is paid directly. The balance does not become a part of the account balance that could bear interest. It would remain constant throughout the year. For example, if you have $100 in your account and you earn 10% interest, you would have $110 at the end of the year. Each year would only pay out interest on your balance not including the interest previously earned. Alternatively, compound interest is earning interest on your capital. Take the example of having $100 in your bank account. If your compound interest earns you $10 for the year, the next year you will be able to earn interest on the capital plus the interest, or interest on $110. It is very similar to a snowball effect in that you can start out with a very small amount of money and without investing any more, it will increase through the years.
The earlier you start investing, the more money you can make without having to do anything. Keep in mind that even small amounts of interest can add up over years; if you start saving for retirement when you are 20 think about how much compound interest will have made you by the time you are 65! If you wait until you are in your 40’s to invest a large sum of money into an account which generates compound interest you will be missing out on easy money.
One way to meet your financial goals is to be smart and let your money do the work for you. Remember that the longer time you invest, the more money you will see in the end.
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