Can You Really Turn that Penny Into 1 Million?
Which would you rather have? 1 million dollars or 1 penny doubled every day for 31 days? If you’re like most people, you’d probably pick the 1 million. Many people are focused on instant gratification and to have that money in cash readily available to spend, would be awesome.
However, a small percentage of people would prefer the penny scenario, where its value would increase over time. But why? It’s simple math that makes the penny enticing. Saving money for a long period of time can reap great rewards. It’s all about saving and investing, or a term called compound interest.
What is Compound Interest?
Compound interest is when the interest you earn on a balance in a savings or investment account is reinvested, earning you more interest. As a wise man once said, “Money makes money. And the money that money makes, makes money.” With compound interest, you’re not just earning interest on your principal balance. Even your interest earns interest. It’s how investments gain value over time, and how people can retire with money in the bank. Below are just a few scenarios of how compound interest works. Check out this handy compound interest calculator you can use to enter your savings goals, courtesy of investor.gov.
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$1,000 in a savings account that earns 5% in annual interest (2 years)—During the first year, you’d earn $50, giving you a new balance of $1,050. In year two, you would earn 5% on the larger balance of $1,050, which is $52.50—giving you a new balance of $1,102.50 at the end of year two.
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$1,000 in a savings account that earns 5% in annual interest (30 years)—Earning a 5% annual interest rate the whole time, and never adding another penny to the account, you’d end up with a balance of $4,321.94.
Interest can be compounded, or added back into the principal, at different time intervals. For instance, interest can be compounded annually, monthly, daily or even continually. The more frequently interest is compounded, the more rapidly your principal balance grows:
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$1,000 in savings, interest compounded daily instead of annually (30 years)—You would end up with a total balance of $4,481.23. You would have earned an additional $160 from interest being compounded more frequently.
Retirement is important and investing is how you get there! Just imagine earning 5% on your money every year for the next 30 years. That can be empowering! That’s compound interest!
You may not have access to a quick 1 million, but you can start your retirement and investment strategy today by speaking with an NIH Federal Credit Union Wealth Advisor to help align your financial plans with your goals. It brings the credit union’s “people helping people” core values to the wealth management services we offer our members.
Resources:
DebtRoundup.com
Forbes.com
Investor.gov
