| First, we need to understand
how compound interest works. It's how your money
grows! Getting this will help you understand the
best way to save and invest. Yes, it's math...
But, not the math of text books... This is the
real stuff and it's very simple!
Let's invest $1.00 in an account that
pays 12% interest each year... and let's say that the
account is compounded yearly.
|
Compounded yearly means that, at the end of
each year they add the yearly interest
(12%) to your account.
(That's 12% of the amount in the account.) |
What if we make the same
investment, but it's compounded semi-annually?
|
Compounded semi-annually (twice a year)
means that, at the end of June they add 6% of
the amount in your account...
and at the end
of December, they add another 6%. |
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|
Now, let's make it compounded
quarterly...
|
Compounded quarterly (four times a year)
means that, at the end of each quarter
(three months) they'll add 3% to your
account. (Remember that this is 3% of
what's in the account at that time.) |
Do you see that, the more times
the account is compounded, the more money we make?
Sure, it's only a really small increase, but if we
invest a million dollars... It's going to
make a big difference! |
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