What Is Compound Interest?

Compound interest is what grows your investments. Saving money under your mattress or in a safe in your closet seems like a good idea at first, but you have to keep adding to it to make it grow. Compounding is when your money grows by itself. The most you have to do is to not touch it.

How Does Compound Interest Work?

Let’s say you invest $100 in an account that grows 5% annually. The first year, you get $5 in interest, making your account work $105. The next year, you get 5% interest on that $105, giving you $5.25. Now you have $110.25. Each year, you get 5% interest added onto what your total ends up being after the last year. If you keep adding your monthly saving to that account, it grows even faster. Soon, your money starts growing exponentially.

What Kinds of Accounts Offer Compound Interest?

While savings accounts and money market accounts both typically offer compound interest, not many of them pay more than 1%. It’s best to go with zero-coupon bonds or dividend stocks because they pay the highest interest. With dividend stocks, you may need a brokerage to handle your bidding for you to ensure you get the best return on investment.