Compound interest refers to the interest an individual earns on both the initial amount invested or deposited in addition to the interest earned over time.
Let’s break down that concept.
If you put an initial deposit of $1,000 in a savings account that earns 5% interest per year, by the end of year one you would have $1,050.$1,000 + 5% = $1,050
In year two, you would now earn 5% interest on top of the $1,050 you finished year one with, meaning that by the end of year two you would have $1,102.5.$1,050 + 5% = $1,102.5In this example, you’ve earned – or compounded – the interest on your initial deposit + the interest you earned over time (from the year prior). Over longer periods of time, the impact of compound interest can ‘snowball’, allowing individuals to greatly accelerate their investing and savings ambitions.
Investors have a variety of options to choose from to earn interest or generate a yield, including: savings accounts, Syfe’s Cash+ product, dividend-paying stocks, and REITs.It’s important for investors to realise that while products like savings accounts carry virtually no risk of loss, when you invest in assets like dividend paying stocks or REITs – there is a chance that your initial investment can decline in valueIn saying that, dividend-yielding stocks or REITs do tend to earn higher yields than products like savings accounts, creating opportunities for more risk tolerant investors.
Using Syfe’s Compound Interest Calculator is simple. To get a better understanding of the power of compounding, just complete the following fields in the calculator below:
- Principal amount: Refers to the amount of money you have ready to save or invest with.
- Time period: Refers to the time period – in years and/or months – that you’re planning to let your initial deposit compound for.
- Rate of interest: Refers to the percentage amount that you anticipate your initial deposit will grow at, on an annual basis.
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What is the difference between simple and compound interest?
Simple interest is calculated based on the amount you invest (also called the principal amount).
Compound interest, on the other hand, is accumulated based on the principal plus the interest you have already earned.
What are the benefits of compound interest?
Compound interest allows you to grow your money at a faster rate compared to simple interest; compound interest accelerates the growth of your wealth as the principal amount plus the interest earned grow together.
How can I harness the power of compounding?
A great way to maximize compound interest is to start investing early. Investing your money early allows you to harness the benefits of the prolonged compounding period; the sooner you start, the more you can enjoy the benefits of compounding.
This calculator is designed to be an educational tool for your general information only and is not meant to provide investment advice. We make some assumptions when building the calculator, which you can read about above, and the results presented may not reflect the actual growth of your holdings. You should not rely on this calculator to make any decision and we are not responsible for any consequences of you choosing to do so. Speak to one of our wealth advisors if you need professional advice.
This is a tool to determine your financial gaps based on data you provided. We do not provide any recommendation or financial advice. The information, assumptions and simulation are obtained from sources believed to be reliable, but Syfe makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose. Syfe does not assume liability for any illustration provided here or for your reliance on these illustrations