Compounding Interest Made Easy
Perhaps the easiest way to get your foot in the door to open up the world of investing is to start by taking a small chunk of money and dumping it into a personal investment savings account. You can start small and watch it grow by opening up a multiple deposit savings account that will have a much higher interest rate than your standard savings account. The difference between this kind of investment savings account and your normal savings account is that you will not be able make regular withdrawals from the investment. In effect, what you are doing is reversing the loan process: you are actually lending a portion of your money to your bank or financial institution in the form of an investment. While it never actually leaves your hands, you cannot withdraw it before the end of your agreed upon investment term time. As a reward for this action on your part, your bank will pay you interest on the sum, which is why investment savings accounts benefit both parties involved. You win because you gain interest by leaving your money alone in a separate account, and your bank wins because they get to hold the total of your investment deposits just during the time specified.
How to Save for a Future Expense Using Deposit Growth
If, for instance, you were to decide that a few years from now you wanted to make a large purchase such as a luxury exotic vacation in Europe, you might start by putting away a relatively small sum of $500 in an investment savings account. You would have the option to set up an automated monthly recurring contribution. This is the percentage of your income you feel comfortable putting towards your future savings goal each month out of your paycheck. If you decided to contribute just $100 per month, with a goal of saving a total of $5000 before you go on your trip, it would take just 42 months (or 3.5 years) to meet your savings goal. This scenario takes into account an interest rate of 3.5%. This simple calculation shows that it is feasible for consumers to put small stores of money away and gradually transform them into significant savings.
The Time Calculator
Using the calculator which estimates the amount of time it will take you to reach a particular financial goal within the specific range of current funding and annual percentage interest rate that you have found, it is easy to set reachable achievements and accomplish them within a predictable time frame. When you contribute small amounts regularly to an initial deposit, the money that is being taken out of your monthly paycheck usually won't seem like more than a drop in the bucket. But the end result is generally a plump figure that savers won't believe is really their own.
Thus is the magic of small deposit and big growth. While you have ignored and forgotten about that lump sum in a separate account, and neglected to look at your bank statements which show a certain savings amount being withdrawn each month, your money is piling up and gathering interest to help you meet your goals.