When it comes to growing your money, few things work harder—or smarter—than compound interest. You don’t need to be a financial expert to take advantage of it. In fact, just understanding how it works can help you make better decisions about saving, investing and planning for the future.
Let’s walk through what makes compound interest so powerful, why it can be a great tool to help offset inflation, and how it can support your long-term financial goals. We’ll also explore a helpful calculator to illustrate how compound interest can grow your money over time.
What is compound Interest?
At its core, compound interest is “interest that earns interest.”1 When you invest or save money in an account that compounds, you’re not just earning interest on your original deposit—you’re also earning on the interest that that you continue to receive.
Let’s say you invest $1,000 in an account earning a 5% annual interest rate and contribute an additional $100 each month. After the first year, you’ve earned interest on both your initial investment and your monthly contributions. By year two, you’re earning interest on your contributions and the additional interest you already earned. That extra growth may not seem like much at first, but it can add up over time. Take a look at the chart and graph below to see how this works.
Why compound interest matters—especially right now
One of the biggest financial challenges people face today is inflation—it quietly eats away at the value of your assets over time. That’s why saving or investing your money where it can potentially grow faster than inflation can be beneficial. Compound interest can help.
Whether it’s through a retirement account, a savings account or annuity products that earn interest, compounding interest helps your money grow in a way that can help keep pace with rising costs.
Let compound interest work for you
Whether you're saving for education, building a safety net or planning for retirement, compound interest rewards steady progress. Even small, regular contributions can add up. Consider these steps when setting your savings goals:
- Identify what you're saving for (college, home, emergency fund, retirement).
- Set a target amount and a timeline.
- Choose an account or product that offers compound interest.
- Make regular contributions, even if they’re small.
- Review your progress at least once a year and adjust as needed.
Try it with a compound interest calculator
Want to see how compound interest could help you reach your goals? A compound interest calculator* can show you how your savings could potentially grow over time. Just enter your starting amount, how much you plan to contribute, your expected interest rate and your time frame. It’s a helpful way to set realistic expectations and establish how much you need to save.
Compound interest is a simple savings tool that doesn’t always grab the spotlight, but it can do some heavy lifting in your long-term financial growth. Everyone’s financial situation is different, and how you apply these strategies depends on your individual goals. For guidance tailored to your needs, speak to a financial professional.
