By: Tanner Moroder
Saving money for the future is a very important and stressful task. Many people struggle saving money for the next stages of their life such as, college tuition costs, buying a house, or even a new car. All of these purchases provide financial problems because people aren’t thinking of saving their money early. They don’t realize all the saving opportunities that are accessible to them. One of the best ways to save money over time is using compound interest to your benefit.
First compound interest is gaining interest on top of interest. Instead of just having a traditional savings account with simple interest that goes up at a constant rate, a different method is to use compound interest where your money goes up at an exponential rate. Compound interest takes your initial principal and builds more interest over time based on your compounding periods. Compounding periods can take place continuously, daily, or monthly.
According to smartasset.com, when investing or saving, you should always try to use compound interest because compound interest benefits the investor by giving them more money overtime than traditional interest. The example below shows how much more beneficial it is to use compound interest rather than traditional interest. The graph shows that over a twenty year time period you can save around $75,000 by just using compound interest instead of traditional simple interest.
As you can see from the graph there is no doubt that compound interest is better than simple interest because it is exponential versus linear. The exponential growth lets you gain more interest over time and save more money in the long run compared to having a constant linear interest growth.
Although, compounding interest as an investor or saving for retirement is very helpful, it can also work against you. Compound interest is used on loans from the bank because that is how they make money. The same concept applies when compound interest is working against you, the interest builds on top of the interest you already made making you more and more in debt. With many of us planning on going to college and buying a house someday, you have to be very aware of your loans and how the interest is compounding. Staying on top of your loans is very important because instead of paying back a 100K loan, your grand total could be around 320K in 20 years without staying on top of your payments. Another problem with compound interest is that around 31% of people know about compound interest. According to Value Penguin, a free informational and helpful consumer spending company, which asked 2,000 Americans if they could define key financial terms like net worth and compound interest, 69% of the people didn’t understand them. That means all of those people are at a disadvantage because they don’t know how to use compound interest to their advantage to save them more money. 69% of the world isn’t set up for success because they aren’t using compound interest. If everyone knew and used compound interest everyone would be better off financially even in the smallest way.
All in all, compound interest has its advantages and disadvantages but in the end compound interest helps you more than it hurts you. By staying on top of your loan payments you will be less affected by compound interest and not be fully penalized. On the other hand as an investor the longer time you save with compound interest the more money you can save in the long term. Using compound interest to your benefit can save you a lot of money, but also set you up for financial success.
Works Cited
Dixon, Amanda. “Simple Interest vs. Compound Interest.” SmartAsset, SmartAsset, 18 July 2019, smartasset.com/investing/difference-between-simple-and-compound-interest#:~:text=Compared to compound interest, simple,calculate and easier to understand.&text=When it comes to investing,with a simple interest rate.
Kagan, Julia. “Compound Interest.” Investopedia, Investopedia, 3 Sept. 2020, www.investopedia.com/terms/c/compoundinterest.asp.
Marquit, Miranda, and Carlo Dies Says: “What Is Compound Interest and How Does It Work?” Investor Junkie, 16 Oct. 2019, investorjunkie.com/investing/compound-interest-investments/.
Team, Posted ByHorizon Trust. “What Are The Best Compound Interest Investments? Top 7 Picks.” Horizon Trust, 1 Aug. 2019, www.horizontrust.com/what-are-the-best-compound-interest-investments-top-7-picks/.
kathleen_elk. “Most Americans Don't Understand a Money Term That Can Help You Save Hundreds of Thousands of Dollars.” CNBC, CNBC, 9 Apr. 2019, www.cnbc.com/2019/02/11/how-compound-interest-works-and-how-it-can-help-you-save-money.html.
I loved how in depth you went on compound interest. People don’t realize how beneficial it truly is. Just like you said with the study how 69% of Americans do not know simple banking terms. If people understood how compound interest was better than traditional interest, they would do much better in life. However, my question to you is, how can I get compound interest? Do I just ask my bank to put on compound interest or is it only certain accounts that can have compound interest or do I have to earn it?
ReplyDeleteGood job on the in depth facts about compound interest, I do know that there are people out in the world who may not even know what compound interests are, or even realize the importance of knowing about them. Also, you did an amazing job on using good facts, I can definitely tell that you took your time and did research, but a question that I have for you is, how does one obtain compound interests? Does compound interest correlate to credit score, or loans?
ReplyDeletegreat job on explanation on how compound interest works over time and how its better to use over time rather than traditional interest. because i now feel more educated about how to use it in the future. however my one concern is how do i take the most advantage of this at a young age and start it up like thorugh stocks or my bank applies it or do i earn it over the course when i get older. are there rules to compounding like investing for rertirement not able to take money out. these are things i wish you talked about more thanks for the help
ReplyDeleteGreat job applying something we briefly reviewed in class, into a well-developed article about compound interest as a whole! I can tell you thoroughly understand this topic, and I even learned some things while reading it; for example, I always saw compound interest as a great thing for the investor, however it definitely can hurt you when applying for loans or things of that sort. Do you think all banks and financial institutions offer compound interest?
ReplyDeleteThis blog really does show that just a little more research into financing can go a long way. The best example is the graph, just knowing how compound interest works can really help in the long run, all the way to retirement. If one were to not do much or any research into financing, they could be missing out on thousands of dollars in the long run.
ReplyDeleteBefore this class I never knew about compound interest and it really can help you which is why I am surprised that more people don't know about it. One question I have is where and how can you get compound interest? Are there certain financial institutions that have certain accounts that earn it? I think your blog was very informative because I now understand compound interest a lot better and realise how it helps people earn so much.
ReplyDeleteI like that you decided to focus on a topic we talked about in class. I still had some questions but this article pretty much cleared those up for me.
ReplyDeleteI thought you did a really good, thorough job explaining what compound interest was. Before reading this article, I knew what compound interest was, in general, but not enough to know the advantages and disadvantages of it. After reading you blog, I felt a lot less ignorant on the subject. One thing that surprised me from this article was when you stated that 69% of 2,000 Americans are not aware of what compound interest is. After hearing this, and knowing how useful compound interesting is, it really makes me wonder why more people don't know about this type of interest? All in all, I thought you did a really great job on your blog!
ReplyDeleteCompound interest is important when saving money for a long period of time, this will allow the money to grow for a longer period of time while increasing the interest rate. Tanner's visual is easy to understand and provides a lot of insight to his blog entry. Tanner explains how compound interest works and the importance of saving early. I learned a lot from his blog post because he did a really good job going into detail about this important topic. Overall, compound interest is something to invest in if you want to invest a chunk of money for a long period of time to create the most profit.
ReplyDeleteGood article I like how you stayed on pair with the stuff we talk about in class. It helps me understand it a bit more. Its crazy that so many people don't know about compound interset.
ReplyDeleteI really liked your explanation on compound interest it was super easy to follow. I also liked how you talked about compound interest within loans and savings accounts, because they are kinda different. Looking at the graph you had, I can't believe how much more money you can save, that's actually crazy.
ReplyDeleteIs there a way you can use compound interest as only growing your money? Recently I have heard a lot more about kids our age starting to invest in stocks and maximize their oppurtunity to make money. I am more curious about a risk-free way of investing into different markets. I see that compound interest can have negatives and positives, is there a way to eliminate that element of losing your money? I found this a very informational and organized blog piece.
ReplyDeleteClearly, based on your information provided, setting up investing/retirement accounts that use compound interest for the loan is the way to go. But, I was interested in what types of accounts these are, and what types of accounts to avoid, that do not use compound interest. For instance, any normal savings account would not accumulate compound interest, however most IRA’s as well a stocks pay dividends, which work similar to compound interest.
ReplyDeleteYou made a good point about how people don’t do a great job in saving and investing their money. It is important to think about the future and always have money saved up somewhere. This money can be useful because if an emergency happens so you can access it, and it is almost like free money. It is passive income, meaning you make money while doing nothing. There is no point in not taking up on these passive income opportunities. Once you decide to save and invest money, you need to know how to do it and you gave great information on how compound interest can be much more beneficial than traditional interest. It is crazy how you can make $75,000 from compound interest, this shows there is no reason to not save money with compound interest.
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