The Joy of Compound Interest

Compounding Interest

How can you make your savings work even harder for you? Make money on the interest as well as the lump sum. It’s called compound interest. Here are some useful facts to learn about it.

There are any number of compound interest calculators available on the web but the principal of compound interest is really very simple: it’s money you make on your savings, that you then make more money on; interest on your interest.

This is why saving even a little bit of money at regular intervals can make such a big difference to most people.

How do you do it?

The key is to reinvest your earnings, leaving your interest in place to help make you more money. When you earn interest on your balance, don't spend it, if you don't have to. If you leave it in there, it will not only add to your balance and build up the account, but you will then be earning interest on the combined total. You'll be earning interest on your interest!

If the interest is calculated daily, that can work in your favour. It can also be calculated or paid weekly or monthly. If you choose an account that only pays interest once a year, then your ability to earn compound interest is reduced.

Start saving sooner not later

If you are new to saving you probably don’t know how much you are spending right now. Before you make a savings plan working out what you spend your money on is a good idea. Keep a little expenses diary for a week or even a month and write every little thing down. The key to successful saving is to set attainable goals. If you make it too hard for yourself you won’t be able to get into a consistent habit and may end up throwing the whole idea away. Set yourself up for success so that saving can become second nature.

Saving 10 percent

If you have an irregular income, setting yourself a goal to save 10 percent of whatever you earn may be a better way to organise yourself. For people with a fixed income, consider setting up an automated deduction from your bank account into a high interest savings account each week.

Bank accounts for savings

To further improve your compound interest benefits, you should choose a bank account with a high interest rate, some even offer bonuses for depositing funds and not withdrawing. This could work well for someone aiming for the compound interest saving strategy! Compare interest rates on bank accounts here at MoneyBuddy.

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