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Personal Finance Tips – The Most Powerful Force in the Universe – Compound Interest

Personal Finance Tips – The Most Powerful Force in the Universe – Compound Interest

You may have wondered what is the secret of making wealth? Earning more and more money? For some extent, yes, this is a good answer. But the best thing is to make the money you already have earn more money for you. Frequently this small difference in thinking makes somebody a millionaire from a wannabe.

The thing is that the money you earn with hard work is nothing compared to what you can earn by letting your money work for you. There are a few simple steps for getting your money make more money.

The best thing to do is add savings to your budget, meaning that you should pay your savings bill just as you would pay your electricity bill. You can ask your bank to deduct the savings automatically from your paycheck, or you can put your savings in an account that can not be accessed with an ATM card. This way if you would be tempted to spend the money, you will give it a second thought.

Compound interest was called by Albert Einstein “the most powerful force in the universe”. With compound interest not only your money makes money, but the money your money makes earns money too.

But how does it work? With a 3 percent interest rate your $100 deposited in an account would be $103 after a year. But you earn interest not only on your initial deposit, but also on the interest your initial deposit makes. If you set aside $100 each month, at the end of the year your bank account would have $1,223.81. The $1,200 you saved and $23.81in compound interest.

Because of the compound interest often you can see two rates in savings accounts advertisements: the APR (annual percentage rate) and the APY (annual percentage yield). The second means the percentage the account actually earns with compound interest. APY is somewhat higher than the APR, depending on whether the interest is compounded monthly, quarterly, or annually.

There are many compound interest calculators to be found on the Internet. With these you will be able to determine how your savings will grow in 5, 10, 20 years. All you have to do is plug in the amount you are saving, the percentage rate and how the interest is compounded.

You should carefully shop around for the best deals, as traditional savings accounts don’t pay much interest these days. And you could also consider an online-only account, as it can pay three or more times the interest offered by a regular bank or credit union.