Compound Interest Accounts: All You Need To Know
Are Compound Interest Accounts Important?
If you ask anyone if they are interested in increasing their wealth their answer will be a resounding “yes”. There are several ways to invest and start making your money work for you! However, we will be speaking about the phenomenon that is compound interest.
What exactly is compound interest?
First of all, you need to know exactly what compound interest means. Compound interest can be simply defined as the interest that is calculated on the starting principal amount and the accrued interest from earlier periods on your accumulated savings. In other words, compounding works by your investment generating interest, and then that interest also generates more interest. It really is an impressive system.
How is compound interest calculated?
Once you are investing your money, you should understand the math behind the investment.
This is the formula for Compound Interest:
This is the formula for Compound Interest:
X= P (1 + r/n)^(nt)
It may look complicated at a glance, but we will take you through step by step.
X= Final amount
P =Principal (Since we are looking at this formula in terms of investment and not loans, this amount would be the initial investment sum)
r = interest rate
n = the amount of times interest is applied per period
t = the number of time periods that have passed
Let’s do an example to solidify the concept.
So, if your initial investment (P) is £5000, the interest rate is 8 % which when turned into a decimal is reflected at 0.08. The amount of times interest is applied per period, which is called compounding (n) is 12. The number is 12 because here, we are compounding monthly. The number of time periods that have passed thus far (t) is 10 (years).
A = £5000 (1 + 0.08 /12)^(12 * 10) = £11,098.20
So, the investment balance after 10 years is £11,098.20
So, as you can tell you have made (£11,098.20-£5,000) £6,098.20!
What are the compound interest accounts available?
There are a few options that you can explore if you want compound interest to work for you.
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Different Types Of Compound Interest Accounts
Next will discuss compound interest accounts in general and some of the best compound interest accounts. We’ll try to help you discover which compound interest bank account is uniquely suited to your financial needs.
These accounts are designed to increase your initial investment. If you let that money sit without making a withdrawal and if you keep making deposits, your investment will continue to increase. Some savings accounts put the compound interest method to work, allowing customers to see a significant increase in their principal investment. These savings accounts that utilize the compound interest method are generally referred to as compound interest banking account. They are definitely worth looking into.
Money Market Accounts
Money market accounts are another example of compound interest accounts. They are also referred to as money market deposit accounts.
These compound interest accounts come with these advantages:
- They often have an impressively high-interest rate.
- Your money is insured. So, you can sleep peacefully at night knowing that your money is safe.
- You are often allowed to have a debit card. While it is always comforting to have access to your money. If you are planning to save, we encourage you to refrain from withdrawals.
- Money market accounts often come with cheque writing facilities as well.
Of course, in order to make an informed decision, you also have to be aware of the disadvantages of money market accounts.
- There may be restrictions placed on the type and number of transactions that you are able to make with a money market account.
- There will be fees attached to this account.
- There is always a minimum balance requirement.
This means that you will only be allowed to open an account if you have the pre-determined starting amount. So, if the stipulated amount for the account is £500, then you will not be allowed to open the account if you have less. Additionally, if your balance drops below £500 you will be penalized.
Certificates of Deposit
This is another example of what compound interest accounts have to offer. A certificate of deposit is a financial product that offers you a specific interest rate in return for leaving a fixed lump sum deposit for a number of years without touching it.
The allure of this kind of investment is as follows:
Guaranteed high interest- Almost all certificates of deposit offer an extremely attractive interest rate.
Safe Investment-With a certificate of deposit, you are guaranteed a particular rate of return on your investment. So regardless of the fluctuation in the markets, your return is sure after the allotted time.
Insured Investment- Your certificate of deposit is insured by law.
Helps you save- Since you cannot touch the money without incurring penalties, you save whether you want to or not.
There are a few drawbacks to this financial product.
No cashing in before time- Since the goal here is savings and investment, certificates of deposit make it difficult for you to make a withdrawal. You will evoke a heavy penalty if you cash in your certificate of deposit before the maturity date.
A fixed rate of return- As we mentioned before this is a safe investment. However, there is a price for that safety, you will not be able to take advantage of favorable interest rates during the term.
What are the best compound interest accounts?
We recommend a certificate of deposit if you have long term plans. If you are saving for a car, house, or maybe the vacation that you have always dreamed of. You also need to have a sum of money that you will not be needing for a relatively long period of time. While it is considered a conservative investment, it often offers the highest interest rates compared to savings and money market accounts.
Now, a compound interest bank account (high-interest savings account) has its own attraction, you will have access to your money without hefty penalties if you need it if an emergency arises. However, your interest rate will be lower than what you will be offered if you choose a certificate of deposit.
Make Your Money Work For You!
If you are interested in making your money work for you via a compound interest bank account, you can follow this link:
and get started right away! Remember financial education is the key to financial success.