Ashley Temer is a Financial Representative with Northwestern Mutual who helps professionals, families, and business owners plan for financial security. She’s here for your “Money Minute.”
You’ve heard it before – “start saving as soon as possible so you can harness the power of compound interest.” But, when you have a savings account that only earns 1% a year, you’re probably thinking what’s the point? You many not realize just how helpful compound interest can be when you’re trying to grow your money.
There are two types of interest. The first is simple interest. $1,000 in your checking account earns 5% annually. Fast forward five years and you will have earned $250 in interest. On the other hand is compound interst where you’re making interest on interest. If that 5% was compounded annually, in five years you would have $1,276 in the bank all without depositing another dime.
So if you are saving money, compound interest is the way to go. But when you are borrowing money, either from credit cards or loans, it can be a burden, not a benefit. The bottom line is to start saving early and regularly.