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How to Invest in Compound Interest
In this article we are going to talk about compound interest. We will be talking about what it is, how to invest in a compound interest account, how to compound interest, and much more. However, we cannot continue until we know what compound interest is.
What is Interest?
In money terms, interest can be viewed as good or bad. For example, if you are in debt and miss a payment, interest will mean a small amount of money added on to the balance you owe. For example, if you owe $10,000 on a loan and miss a payment, the interest rate (i.e – .05 percent) will be tacked onto the balance. So you will owe more.
However, interest can also be good if you are saving money. If you tuck away $1000 in a savings account and let it sit there, it can accrue interest. An annual percentage yield (APY) will be key here.
If the APY is approximately 1 percent and you have $1000 in the bank, you will earn $10 at the end of the year. Not a bad way to earn a little money, right?
Simple and Compound Interest
Let’s explain the different types of interest that exist: simple and compound. Simple interest is defined as the percentage of a principal that is added on the amount of a loan. It uses the following formula: principal (“P”) times the interest rate (“R”). For example, if the principal is $1,000 times the rate of 0.05, the total interest is $50.
Now, compound interest is a bit more complex. Not to mention, it uses a complex formula. The formula is as follows:
p x (1+r)t-p = Interest
This will also factor in the number of years based on the life of the loan. The compound interest rate will add up over time while increasing the principal amount. If you are dealing with compound interest, the last thing you want to do is miss a payment and wind up paying extra.
How it Works
This will depend on the kind of interest you are dealing with. If you take out a loan with a simple interest rate of .25 percent, you borrow $2000. It will be repaid over the course of five years. This interest rate is unchangeable for as long as you are paying the loan.
The interest that you will likely be paying over the period will be as follows: 2,000 x 0.25 x 5. So you’ll be paying about $250 in total interest during that time period.
Compound interest is an interest rate that will compound every year. Let’s say you have $2000 in the bank. The interest rate is 5 percent. After one year, you get $100 added to the account totalling to $2100.
The next year, you’ll have $2200 plus approximately $105 in interest. Over the course of a 10 year period, you could have up to $3200 in that account thanks to compound interest. Crazy, right?
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How to Invest in a Compound Interest Account
If you want to invest in a compound interest account, you have to know where to look. In a moment, we’ll show you a couple of sure-fire investments that you can put your money into. The important thing to look for is interest rates that are usually on the high end.
As such, the higher the interest rate, the more you’ll earn. You’ll want to find an interest rate that is tailored to your financial goals. You may be tucking away a portion of money to the side in an effort to grow it even further.
It starts by finding a bank that will have the options available in what to invest. Our suggestions will be mentioned shortly. We’ll also provide you with a list of financial institutions that offer investments with high compound interest rates.
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Things To Remember When Investing in Compound Interest
While there are some things you can invest in like stocks and bonds, you may lose money in these investments. That’s why we encourage you to invest in something much safer. Especially if compound interest is what you want to earn in the process.
Also, you’ll want to consider thinking about the long-term. Your money will grow over the course of several years. Unless you find something that has a ridiculously high interest rate, you want to keep your financial goals a bit more realistic.
It will also depend on the amount of money you start with in your initial investment. With that said, let’s move on and discuss what you can invest in that has compound interest.
What Can I Invest in That has Compound Interest?
There are plenty of investment opportunities that have compound interest. Let’s take a look at the following:
- CDs: A certificate of deposit. These are very safe to invest in and will be issued by banks with higher interest rates. These rates are higher than standard savings accounts. You are paid interest at various intervals. Over time, you get the principal and the interest until the CD matures or if you need the money as soon as possible. To find a CD to invest in, here are some CDs to consider.
- High-Interest Savings Accounts: While they may not have interest rates as high as CDs, they are great to have when you need the money quickly. The investment may cost you more as well. As long as you add money and gain interest, you should earn a bit more money just letting it sit there. If you’re not sure where to start, you can check out this list right here.
- REITs: Known as real estate investment trusts, this will help you cut your teeth into the world of real estate. That is assuming that’s the path you want to go down. You’ll be able to collect compound interest and a bit more without having to manage buildings or collect rent. The best place to invest in REITs is Fundrise.
It is important to know how to make your money stretch. Being on the receiving end of compound interest is where you want to be. Otherwise, you are paying more than you should, so, take the time to understand interest before investing. Also, never put all your eggs in one basket and make sure you have money for emergencies or anything else that could occur.