Compounding Your Money

[A hand holding three stacks of coins with plants appearing to grow out of the top of each stack.]

Video Testimonial

Do you remember in school when you learned how to make compound words like putting “dog” and “house” together to make the word “doghouse” or put “high” and “way” together to create “highway?” Compound interest does the same thing; it puts money together to make more money.

Instead of your money just sitting in an account doing nothing; it multiplies over time. This means your savings can grow much faster compared to a simple interest account, where you only earn interest on your initially deposited amount.

Compound interest works best when you give your money time to grow. Your money growth is based on how frequently the money is compounded or when interest is added to your savings: it  can be daily, weekly, monthly, quarterly, or yearly periods. The periods are determined by the lender or investment firm. 

Compound interest is an excellent money management tool to help save for retirement, grow savings, and make investments for the future. Think about this: If you put $100 each month into an investment account that earns an average of 4% every year, compounded monthly, and continue that pattern for 40 years, you will have put in $48,000 of your own money. But, the total investment value, because of compound interest,  will be $118,000. That is more than double the deposited money!

Interactive Video

[Man smiling with hands clasped in front of his chin. His thought bubble has $100 in it.]

[On screen text]: pays 5% interest yearly

Narrator: Imagine you have $100 and you put it in a bank account that pays 5 percent interest yearly. 

[Graph labeled “Year 1.” A rectangle with $100 inside it is topped by another rectangle with $5 inside it.]

In the first year, you earn $5 in interest (5 percent of $100). So, at the end of the first year, you'd have $105. 

[Graph labeled “Year 2.” A rectangle with $105 inside it is topped by another rectangle with $5.25 inside it.]

In the second year, you don’t earn interest just on your initial $100. You earn 5 percent on the total balance in the account, which is now $105. So, you'd earn $5.25 in interest (5 percent of $105), bringing your total to $110.25 at the end of the second year. 

[Graph labeled “Year 3.” A rectangle with $110.25 inside it is topped by another rectangle with $5.51 inside it.]

In the third year, you’d earn 5 percent on $110.25, and the cycle continues. Over time, your money grows faster because your balance keeps increasing (if you don’t touch the money).

[A balance scale with the words “with compound interest” on one side and the words “without compound interest” on the other side. The scale swings toward the words “with compound interest” to indicate compound interest is heavier or is worth more.]

Think about these numbers. Compare them with and without compound interest.

• $200/month saved with 5 percent interest for 40 years = $393,000 
• $200/month saved for 40 years = $96,000 

[On screen text]: Wow! What a difference!

[$500 increases until it reaches $642 as a calendar counts to 5 years.]

The magic happens over time—the more times you allow your interest to compound, the more valuable your investment becomes.