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How Do I Start Compounding Money?
Personal Finance

How Do I Start Compounding Money?

Story Highlights
  • Compound interest is the art of finding ways for your interest to earn interest. In other words, for your gains to make their own gains.
  • There is no magic formula. The secret, if there is one, is time.

Making Your Money Work For You

Make your money work for you by starting to compound money. The objective of every investment is to make money by trading present-day liquidity for longer-term gains. You want to maximize your returns, by finding sound investments with high multiples and percentages.

Compound interest is a very helpful tool in this regard. It will allow your investments to quickly ramp up in value as your profits work on your behalf.

So, how can you make compound interest work for you?

Compound Interest: A Brief Primer

Compound interest is the art of finding ways for your interest to earn interest. In other words, for your gains to make their own gains.

Assume you begin with a $1,000 investment that has an annual return of 5%. After one year, your investment will now be worth $1,050. That extra $50 that you have just gained will now also begin to earn interest. This will continue to compound and increase, the longer you leave your money invested.

A good organizing principle to consider is the so-called rule of 72. Taking 72 and dividing it by your expected rate of return will tell you the amount of time it will take for your investment to double. In the above example, 72 divided by 5 equals 14.4. This means, it will take slightly less than fourteen and a half years for your initial $1,000 investment to reach $2,000.

TipRanks’ compound interest calculator can provide an example of how this works in practice. You can experiment by plugging in different variables and compounding frequencies to understand how compound interest will allow your investment to grow at increasingly faster rates.

Taking Advantage of Compound Interest

Even though it is sometimes referred to as a magic formula, compound interest really is quite straightforward. It comes down to a simple concept: the longer you are able to leave your investment untouched, the more value it will accumulate.

Indeed, the same trade off you are making when you initially decide to invest your monies remains relevant throughout the lifetime of your investment. You always have the option of removing your capital to use for other purposes, such as to make alternative investments or to make purchases that satisfy your needs or wants.

However, the longer you can leave your investment untouched, the more your wealth will continue to accumulate. The TipRanks’ compound interest calculator is a useful tool to help you understand what your initial investment will turn into with the benefit of compound interest.

The secret, if there is one, is time.

Conclusion: Compound Interest and Your Savings Goals

Before making an investment, it is important to consider both your end goals and your timeframe. Understanding your horizon will help you define the type of investment that makes the most sense for you.

For instance, if you plan on saving up for a down payment on a house, having a specific number in mind will help guide you towards the type of investment (risk, return, and length) you should pursue. The same holds true regardless of whether you are saving for a new car, college education, or your retirement.

Compound interest, by definition, is the idea that you are making your money work for you. And therein lies the rub: you need to start with something. Your initial sum of money will help you set out on your path, with compound interest providing a valuable assist along the way.

Learn money management, and use data-driven stock insights with TipRanks.

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