The Power of Compounding
Let Compound Interest Work
for You
You work hard for your money. Why not make your money
work for you?
Compare these three ways of managing your money:
1. Daily saving:
Save a dollar a day in a jar. After 10 years you’ll have $3,650. Simply
saving your money--just not spending it--adds up!
But your money isn't working for you yet—and it’s neither safe nor
protected by insurance.
2. Weekly saving:
Once a week, put $7 in your credit union savings account. This is called a
periodic investment.
Assume the dividend rates stay fixed at 2.2%.* After 10 years you’ll have
$3,650, plus $429 in interest, totaling $4,069. Your money is working!
3. One-time savings:
Let's say you have $3,650 saved up. Put it in a credit union savings
account. This is called a lump-sum investment. (Again, interest rates
remain at 2.2%.)
After 10 years you’ll have $3,650 plus $897 in interest, totaling $4,547.
What causes such a difference in earnings? Compound interest.
When you leave your money in your account, you earn interest on the
interest, as well as on the original amount. That's called compound
interest.
In the example, the earnings from periodic investments are about half the
earnings from one lump-sum investment. That's because:
- The weekly $7 investments earn interest on small amounts that slowly get
larger;
- The $3,650 lump-sum investment earns interest on a large amount right
from the start.
Of course you’ll combine both kinds of investments. Most important? Start
today!
* An interest rate of 2.2% is used here only as an example. At the time of
this writing, interest rates on savings accounts are much lower; however,
in the future, they could be significantly higher.
Copyright 2005 Credit Union National Association Inc. Information subject
to change without notice. For use with members of a single credit union.
All other rights reserved. |
