If you’ve ever heard the phrase “make your money work for you,” compound interest is exactly what they’re talking about. It's the main component behind long-term wealth building. The good news? You don’t need a math degree to understand it.

 

What Is Compound Interest?

Think of compound interest as interest on interest. When you invest or save money, you earn interest on your original amount (the principal). Then, the next time interest is calculated, it’s applied to the principal plus the interest you’ve already earned. Over time, that snowball effect can grow surprisingly large. 

Here's an example: 

Imagine you invest $1000 at a 5% annual interest rate, compounded yearly. After the first year, you will have $1050. The second year, you earn 5% on $1050. This brings you to $1102.50 in year two. By year ten, without adding a single dollar, your balance will grow to $1628.89. That means you earn $628.89 by letting time and compounding interest do the work.

 

With small sums of money, you will still see progress, but the real magic happens when you begin to use compound interest on large sums of money. Then, the possibility for growth is endless. And, the earlier you start, the more dramatic the results will be.

 

Time Is Your Best Friend

Saving $200 a month starting at age 25 can leave you with roughly double the amount compared to starting at 35, even if you save the same monthly amount. Why? Those extra years give compound interest more time and opportunity to multiply your money.

 

Tips for Compound Interest: 

• Start as soon as you can: Even small amounts add up.
• Stay consistent: Automatic transfers to savings or investment accounts make it easy.
• Reinvest your earnings: Don’t pull out your interest. Let it compound.

 

Need More Help?

Compound interest rewards patience and consistency. By beginning early and letting your investments grow undisturbed, you are using a powerful financial tool to grow long-term wealth.

 

At Walters Financial Wellness, we work hard to get our clients to where they want to be financially. Whether you’re saving for retirement, a home, or your child’s education, Walters Financial Wellness can help show you how compounding interest can help you get there faster, without working harder. Contact us today!