Many people are familiar with Albert Einstein and his several famous sayings—but a lesser known (yet just as valuable) saying you may not have heard is: “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it”. But what is compound interest, and why did Albert think it deserved to be on the list with the Great Pyramid?
Simply put, compound interest is when you earn interest not just on the money you save and invest (your principal), but also on the interest that money earns over time. Think of it like a snowball rolling down a hill: your money starts off small, but once it starts rolling, it just keeps getting bigger and bigger and at a faster and faster rate! Let’s look at an example:
Let’s say you invest $100 in a savings account that earns you 5.00% interest per year. In the first year, you’ll earn $5 in interest, leaving you with $105. But, in year two, you’ll earn 5% interest on your new balance of $105, meaning you’ll earn $5.25 in interest, leaving you with a new balance of $110.25!
So, the longer you save, the more your money grows. Over time, your “snowball” can grow into a substantial amount, even if you don’t regularly add to your savings—but if you can, you should! Time is the biggest factor in growing your savings. The earlier you start, the more your money has time to grow, and even small, regular contributions can make a big difference over time.
How Can I Get Started?
The great news is that there isn’t anything complicated you need to do to take advantage of compound interest. Simply find an interest-bearing savings account that suits you (like one of our various term Certificates) and make an initial deposit. That’s it! Whether you’re building an emergency fund, saving towards a down payment for a home, or for retirement, compound interest is a powerful tool that is essential to helping you reach your financial goals.
So, be smart like Albert, and start taking advantage of compound interest!