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Cracking the facts

What is compounding interest?

  • March 26 2020
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Cracking the facts

What is compounding interest?

By Digital
March 26 2020

What is compound interest? In this video, we’ll see how Anna’s savings grow with compound interest.

What is compounding interest?

What is compounding interest?

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  • March 26 2020
  • Share

What is compound interest? In this video, we’ll see how Anna’s savings grow with compound interest.

What is compounding interest?

Knowing how compound interest on savings accounts works can help you earn as much as possible on the money you save.

Compound interest is the interest you get on the money you initially deposited and the interest you’ve already earned. 

The concept of compound interest in a saving account is usually compared to that of a snowball. The further a snowball travels, the more snow it picks and it becomes bigger.

The snowball is an analogy of what happens to money you save over time. For example, money saved in your bank account in the first year earns interest. If you don’t withdraw your savings and the interest, in the second year you will earn interest on the interest you earned in the first year. In the third year, you will earn more interest in the interest you earned in the first and second year, and so on and so on. This is compound interest.

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In savings accounts, interest is compounded either daily, monthly or annual and you earn interest on the interest earned up to that point. The more frequently you add money to your balance, the faster your savings will grow.

To gain the full “snowball effect” of compounding interest, make sure to find one that pays the highest rate of interest you can find. A 1 per cent annual interest rate doesn’t sound like much. But at the end of 10 years or more, your account will gain a substantial amount with compounding interest. A 1 per cent interest rate, compounded daily for 10 years, will add more than 10 per cent to the value of your savings. 

The power of compounding helps you save more money. The longer you save, the more interest you earn. 

Explore nestegg to learn more about saving and investment

What is compounding interest?
What is compounding interest
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