Understanding Compound Interest & Using it to Grow Your Money — SHE-WISE (2024)

Compound interest is interest on top of your original interest earned.

Another way to say this is that it is the interest on your interest. First, you will earn interest based on your initial investment and with time, you will earn interest on the earned interest as well. Still with me? I’ll break it down some more.

Compound Interest is the reason why so many folks make money through the stock market, most notably with long-term investments.

Let’s say you invest $100 for one year with an interest rate of 10%. At the end of the year, you would have a balance of $110. This is the sum of the original balance, $100 plus the interest earned on that balance, $10= ($100 * 10%).

Be sure to read all the way to the bottom to earn money just by opening your own account!

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Every year that you hold this money in the account, you will earn 10% on the $100 investment. You’ll also earn interest on the interest you earned from the year before. Here’s an example:

You decide to keep your funds in the account for another year with the same return, 10%. By the end of the second year, your account will have a total of $121. This is the total of the original balance of $110 at the start of the year plus your 10% return, $11. The difference in the $10 return from the first year and the $11 return from the second year is your compound interest. You made an additional $1 on the interest you had earned from the year before. This is your interest on interest or rather, your compound interest.

On the third year, you decide to keep your money in this account. You start with $121 and at the end of the third year with a 10% return, you now have $133.10. The 10% you earned over the last year was $12.10. This includes your original 10% earned on the initial balance, $10, plus the interest on top of interest from the two previous years, $2.10.

Every year you will continue to earn a higher return on top of your original investment of $100.

If you kept your money in this account for ten years, you would have an ending balance of $259.37.

If you did this for 20 years, you would have an ending balance of $672.75.

And if you did this for 30 years, you would have an ending balance of $1,744.94.

Keep in mind, in every example, you have only invested $100 out of your own pocket. Everything beyond the $100 is money earned through compounded interest.

Imagine if you were investing $100 a month for 30 years. Using this example, you would have $218,877.05 at the end of 30 years, with a principal investment in that time of $36,000 ($1,200 a year * 30 years).

If you hope to retire, want to purchase a home, or simply desire more financial stability, it is imperative that you create additional income streams in addition to your 9-5 salary. Investing your money in a secure fund is one of the most profitable ways to do so.

I realize how daunting the idea of investing on your own can feel. I was there not too long ago. I promise you, it’s not as scary or as risky as you think. Keep in mind, that by holding your money in your savings account, you’re actually losing 3% a year due to inflation. I wrote another post all about the difference between your savings account, emergency fund, and investment account here. I encourage you to take a look at that too, especially if you find yourself wanting to hold all of your money in your savings.

Perhaps you feel like your current financial situation isn’t in a place for you to begin investing.

You can start investing with just $1. Truthfully, when I began investing money on my own, I was only able to budget $20 a month! Do you know how important that monthly $20 has been in growing my money? It’s been huge! I would have missed out on so much money if I had waited until I could ‘afford more’.

I have learned that my most preferred way to invest is through index funds. I deposit a minimum amount every month into my brokerage account and then purchase that amount worth of funds. What’s nice about an index fund, at least the one I invest in, is that you don’t have to purchase a set share amount, you can simply invest based on any dollar amount. For example, if one share cost $100 and you only had $80 to invest, you could do exactly that. You would buy $80 worth of a share, owning 80% of one.

I also love index funds because they are made up of a group of the best performing shares in the market. This means that if a share isn’t doing well, it will be removed and replaced with one which is more profitable. Watching the market through 2020 taught me an incredible amount when it comes to investing. One of the most important things I learned was that the value of my index fund decreased least and it also began to increase again as soon as the rest of the market did. Not to mention, even on the worst days during the 2020 economic crisis, my index fund was still up 8%.

It doesn’t matter how much you can begin investing today. It only matters that you start.

Stash-

Remember when I said you could afford $20, well guess what, you’ve already manifested $5 here! When you open up your own Stash account you will earn your first $5 to begin investing! Not only do they offer you the chance to invest through their brokerage account, they also offer you regular banking, budgeting tips, financial advice, and even a credit card.

Digit-

Digit is great for many reasons. It’s definitely the most simplified form of investing, from what I’ve seen, and it also helps you save money in the most passive way. Digit connects right to your bank, passively invests and saves for you, lets you know your daily balance via text and only costs $5 a month.

So, my friend, I want to reassure you that investing is worth it and much more simple than you think! If you have questions after reading this, send me a message! hello@she-wise.com

Happy Investing!