Thursday, December 10, 2015

The Power Of Compound Interest

When it comes to investment accounts, compound interest can be an incredible financial asset. When you have an investment account that earns compound interest, your money can grow at a rapid rate. First Bank of the Lake is here to help you get a better understanding of what compound interest is and how it can help you grow your investments.

An Overview Of Compound Interest

Essentially, compound interest is interest that "compounds" itself. Your principal investment amount will accrue interest for the term (one year, for example), and then the accrued interest will be added to the original principal amount to create a new "principal" amount. Interest will then accrue for this new principal amount for the next term, at which point it will be added to the principal. The pattern continues from there.

This is in stark difference to "simple interest," when the principal amount earning interest will remain the same no matter how much interest is accrued. Simple interest can also help you grow your investment, but the growth will be much slower than with compound interest.

Compound Interest In Action

The concept of compound interest can be difficult to fully wrap your brain around, so the best bank at the Lake of the Ozarks is here to help put it in perspective for you. Th following examples can help you recognize the growth potential that compound interest presents.

Let's say you have an investment account with a principal amount of $10,000 that earns compound interest at a rate of 5% annually. After the first year, it would have accrued $500 in interest (10,000 x 0.05), bringing the total value of your account to $10,500. After the second year, the interest accrued would be $525 (10,500 x 0.05), bringing the total value to $11,025. The third year, the accrued interest would be $551.25 (11,025 x 0.05), which would bring the account's total value to $11,576.25.

In only three years, your investment would have grown from $10,000 to $11,576.25 - an increase of $1,576.25!

To put this in perspective, let's compare it to a different account that only accrues simple interest at the rate of 5%. With an initial investment of $10,000, the account would accrue $500 per year. After three years, the total value of this account would be $11,500 (10,000 + 500 + 500 + 500). 

After the same amount of time, the account with compound interest would have earned $76.25 more than the account with simple interest. (Note: these examples assume that the account holder is not continuing to make additional deposits into the account.)

Give Compound Interest Time To Work For You

While $76.25 may not sound like a lot, we are only talking about a three-year time frame. As the years pass, compound interest will continue to increase exponentially. Consider the same hypothetical accounts we just discussed. After thirty-five years, the account with compound interest would grow from an initial investment of $10,000 to $55,160. In contrast, the account with simple interest would only grow to $27,500 - half the amount of the other account.

Compound interest can be powerful, but it has to be given the time to become so. This is why experts encourage you to begin planning for retirement as soon as you can (even while you're still in your early twenties). The earlier you begin investing, the more time your money will have to grow.

Investing at the Lake of the Ozarks

If you are looking for a safe place to invest your capital, look no further than First Bank of the Lake. With our wide variety of accounts and services, we are sure to provide something for everyone. If you would like more information about our trusted bank in Osage Beach, give us a call at (573) 348-2265 or visit our website.

First Bank of the Lake - Striving For Excellence
Member FDIC. Equal Housing Lender.

Located at the entrance to the Osage Beach Premium Outlets!
4558 Osage Beach Parkway
Suite 100
Osage Beach, MO 65065

(573) 348-2265

No comments:

Post a Comment