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Published 14.05.2015 | Author : admin | Category : How To Make Money On The Internet

One of the most important concepts to grasp when you are thinking of saving and investing and why it is such a worthwhile activity is the concept of compound interest.
The definition of compound interest  is “the interest paid on capital and any previously accrued interest.” But how, exactly, does it work? The idea is that if you can leave your savings alone for a long enough period of time, the compounding will cause the initial sum to grow exponentially.
Some people like to see the power of compound interest at work on real examples of money – this allows them to get a much more clear idea of what is happening. Let’s say you have $1,000 to put aside in a savings account that earns 5 per cent every year.
The important thing to keep in mind is that compounding interest over a smaller time periods is better than longer time periods.

However, if the interest only compounded annually – the total interest for the year would be just $50.00. As you can see, compounding interest can work in your favor to grow your savings leaps and bounds. The power of compounding is considerable and can take a tiny nest egg to a sizeable sum over time. While that $0.97 difference does not seem like a lot of money, the difference over a period of many years and different starting amounts is considerable.
So whenever possible, if you are looking to open a savings account, check to see when the compounding takes place. This means that once you deposit the initial amount, it will earn interest on that amount over a certain period of time such as a month, or a year.

The rates could be higher or lower depending on the general economic environment at the time. At the end of that time period, the interest earned is then added to the initial amount you deposited, and then interest is earned on the new total over the next period, and so on and so forth. Also, some savings accounts will earn higher interest rates but you may have to leave your money in the account and not have access to it for longer periods of time – so just be sure you understand all the account rules when you open it! That is why it is called compound interest – since the new amount is compounded, or combined with the old amount to get a new total figure.

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