It’s important to understand how compounding interest works.
If you get the concept, you’ll be able to make your savings grow quickly.
So, what is compounding interest?
Compounding interest is interest that is paid on your initial amount, as well as the interest you have already accumulated.
Essentially, you’re earning interest on top of interest.
It’s the best possible scenario.
Let’s look at an example
Let’s say you invest $10,000 at 6%.
In one year, you will have $10,600.
Simple enough right?
If you decide to keep that $600 in your account, the next year you will have $11,236.
Essentially, by keeping your interest invested, you’ve earned yourself an extra $36.
Now, $36 isn’t a life changing amount by any means.
But, double that $36 for year 3…see where we’re going here?
This can be a life changer for retirement savings.
Don’t believe us?
If you invest $15,000 at an interest rate of 5.5% after 25 years you will have $57,200.89.
Now what would happen if you did the same exact thing, but over 15 years?
You’d end up with $33,487.15.
Big difference, huh?
That compounding interest really works in your favor.