‘Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it’ – Einstein.
In this article we examine what Compound Interest is and How you can Use Syfe’s Compound Interest Calculator to invest better.
What is Compound Interest?
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% = $1,102.5
In 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.
Which Products Earn Interest or Yield?
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 realize 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 value.
In 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.
How to Use Syfe’s Compound Interest Calculator
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:
- Initial Deposit: Refers to the amount of money you have ready to save or invest with.
- Term: Refers to the time period – in years and/or months – that you’re planning to let your initial deposit compound for.
- Rate of Return: Refers to the percentage amount that you anticipate your initial deposit will grow at, on an annual basis.
- Compound Frequency: Refers to the number of times per year that accrued interest is paid. Common frequencies include monthly (for savings products) or quarterly for dividend paying stocks.
- Monthly deposit amount: In addition to an initial amount deposited, you can select additional amounts to be added on a monthly basis, allowing you to build your wealth over the long term with a dollar cost averaging approach.
- Deposited/loaned at beginning or end of period: Select when your additional amounts are deposited – at the beginning or end of the relevant period.