Finance 101 - Compound Interests for BeginnersJul 15, 2021 | 0 Votes by Justo - rate Compounding is all about investing your money and waiting for the money derived from interests to add up, but there are some people who still don't believe is a strong strategy in your path to financial security.
Compounding is all about investing your money and waiting for the money derived from interests to add up, however, the waiting part of this strategy may make people draw from doing it in the first place, making compounding into a practice fit only for those who can wait.
Although the wait can be tiresome for ones, the revenues at the end of the way surely worth it. If you are a newcomer in regards to financing and investing your money, compounding is an easy and profitable strategy to apply. Here are some facts you should know about compounding to start making money now.
What is Compounding all About?
When it comes to compounding, the explanation is very simple to follow. Compounding refers to the act of investing and adding up the yearly earnings or interests to the full amount you’ve started with. This will make the money to start piling up and grow over time like a snowball rolling down the hill.
You can use your bank account to earn compound interest by saving money for any type of occasion like a retirement plan. As long as you keep the money intact without making a withdrawal, your interests will keep adding up while your total amount grows, resulting in a bigger ‘initial’ investment every year.
How Does Compounding Work?
The math of compounding is as simple as knowing percentages and additions. For example, if you started your compounding by investing $5.000 at 2.5%, at the end of the first year you will have $5.125 total. The catch about compounding is to take the $125 you’ve earned and reinvest them again to the initial $5.000 at 2.5% for another year, resulting in a total amount of $5253,125 at the end of year 2. Once you continue reinvesting the earnings and adding up more money to the initial investment, you’ll see better results every time.
It Has Its Pros and Cons
Compounding has proved to be beneficial for personal finance in general, as the results speak for themselves and is a form of making passive income; nonetheless, it also has some downsides people should know about.
When done the right way, compounding can be a great way to make a good amount of money without making any effort, can help you pay your debts to help you build your credit score once again, and can benefit you personal finance, allowing you to have some cushion to work with when things get rough.
On the other hand, when compounding is done the wrong way, the interests can become more of a hazard than a useful asset. For example, when it comes to your credit card debt, it’s important to pay your expenses on time to keep your credit score intact. If not, you’ll end up growing your negative numbers and will start owning your interests instead of increasing the profits.
It’s recommended to seek professional help when you are pondering to start investing money for your future. Compounding is great and can help you make tons of money but it requires patience and consistency to make it work.