Art of Compounding

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You can save…or you can really save. The difference is compounded interest.

When a financial institution offers compounded interest, it means you get interest on the interest you've already earned. Here's how it works:

• Every period, you earn interest on your savings, checking, CD, or other deposit account.
• If your interest is compounded, the interest earned on your savings is added to your principal balance.
• Then, the next period, you earn interest on your original principal AND on the accrued interest.

When it comes to compounded interest, the frequency of compounding can have a significant impact on your returns. Many savings accounts and investment vehicles compound interest annually, meaning the interest earned in the first year is not reinvested until the end of the year, so it doesn't contribute to your returns until the second year.

Daily compounded interest is less common than annual compounding but can offer significant benefits. With daily compounding, the interest earned on your savings or investments is added to your principal balance every day. This means that the interest earned on day one is reinvested on day two, and so on, compounding your returns faster and more frequently. Monthly compounded interest works the same way, just every month.

If you're looking to maximize your returns, compounded interest can be a powerful tool. Here are some options for taking advantage of daily compounding:

1. Certificates of Deposit (CDs): CDs are a type of investment vehicle that typically offer higher interest rates than savings accounts. Some CDs, like those offered by Tech CU, have daily compounding, which can maximize your returns even further.
2. High-Yield Savings Accounts: Some banks and credit unions offer high-yield savings accounts that offer daily compounding. These accounts typically require a higher initial deposit or minimum balance, but the higher interest rates and frequent compounding can result in significantly higher returns over time.

A handy tool that can help you estimate how long it will take for your investments to double in value is called the Rule of 72. It's a simple formula that involves dividing 72 by the annual rate of return on your investment. For example, if you have an investment that earns 6% per year, dividing 72 by 6 gives you 12. This means that it will take approximately 12 years for your investment to double in value. Keep in mind that this is only an estimate and the rule of 72 assumes the interest rate is constant, which is not always the case in real-world investments.

Although compounded interest is a great boon to savers, it can be a fierce weight to debtors. For example, credit card debt is compounded, so you as the debtor will pay interest on the interest of your outstanding balance. That's why it is so important to pay down credit cards as quickly as possible.

Saving can be very rewarding, especially if you get to see your hard-earned money grow quickly with compounded interest. The frequency of compounding can have a significant impact on your returns. By exploring high-yield savings accounts, CDs, and debt reduction strategies, you can save up quickly for the car, trip, or home you're dreaming of.

Want to learn more? Make an appointment with a Tech CU Banker who can answer your questions and help you set up an account.

Federally Insured by NCUA.