When it comes to saving money, compound interest is like a superpower for your savings. It can help your money grow a lot over time. But what is compound interest, and how does it work?

Understanding Compound Interest

According to Stephanie Martin, a Financial Wellness Coach at Greylock Federal Credit Union, “Compound interest means you earn interest on your money AND on the interest that has already been added. It's like getting extra money on top of the money you already have.”

How It Works

Let's say you put $1,000 in a savings account with a 5% interest rate. With simple interest, you would earn $50 each year. But with compound interest and a yearly compound frequency, you earn interest on the new total each year.

Here's how your savings would grow with compound interest:

  • Year 1: $1,000 + $50 (5% of $1,000) = $1,050
  • Year 2: $1,050 + $52.50 (5% of $1,050) = $1,102.50
  • Year 3: $1,102.50 + $55.13 (5% of $1,102.50) = $1,157.63

As you can see, the amount of interest you earn each year gets bigger because you are earning interest on a larger amount each time.

“Greylock’s accounts are compounded daily,” Martin said, “so you can earn even more quickly.” For these, each day you earn a small bit of interest and the next day, you earn interest on the initial total and on the interest from the day before.

The Power of Time

The real magic of compound interest is that it helps your savings grow more and more over time. The longer you keep your money in the account, the more it will grow. “That's why it's a good idea to start saving as soon as you can,” Martin added. “Even small amounts can add up over the years.”

Tips for Maximizing Compound Interest

  1. Start Early: The sooner you start saving, the more time your money has to grow.
  2. Make Regular Contributions: Adding to your savings regularly will help you earn even more interest.
  3. Choose the Right Account: Savings accounts pay interest and provide convenient and easy access to your money. However, if that convenient access isn’t as important to you, money market accounts or certificates of deposit (CDs) might pay higher interest rates.
  4. Be Patient: Compound interest works best over long periods. Stick to your savings goals and let time do its work.

By understanding and using the power of compound interest, you can make your savings grow faster and reach your financial goals sooner. Visit any Greylock branch or www.Greylock.org today to open an account and start watching your money grow.