Compound interest is a powerful concept that can help your money grow exponentially over time. It is when the interest you earn on a balance in a savings or investing account is reinvested, earning you more interest. This compounding effect can lead to significant growth in your savings or investments over the long term. For example, if you put $10,000 into a savings account with a 4% annual yield, compounded daily, you'd earn $408 in interest the first year, and that interest would continue to compound year after year.
We bet these two compound interest examples will make you a believer (and possibly inspire you to open a retirement account!). Use the Acorns compound interest calculator to see how your money could potentially grow over time with the power of compounding. It's a great way to visualize the impact of compound interest on your savings and investments.
In another example, let's say you start with $1,000 in a high-yield savings account that earns 5% interest annually. After the first year, your balance would be $1,050. In the second year, you would earn 5% interest on $1,050, resulting in a balance of $1,102.50. This demonstrates the power of compounding - earning interest on your initial deposit and the interest you've earned over time.