How can I make compound interest work for me? The credit card’s high 25% interest rate meant that Amanda’s $150 payments didn’t even cover the interest on her debt each month. Amanda went from owing $10,000 to owing more than $10,786 one year later, even though she paid $150 per month. Unfortunately, Amanda was unable to pay off her credit card balance, and the interest charges began to compound. Instead of scaling back her plans, she booked a trip to Tahiti on her credit card. Time and compound interest caused his loan balance to grow.īrandon’s sister Amanda wanted to go on vacation, but had not saved enough money. After ten years, Brandon’s loan balance grew from $50,000 to $65,866, despite making payments every month. While the repayment program freed up money to help him pay his monthly bills, the payments were not enough to cover the interest on his student loans, much less the principal. Brandon was not able to find a job in his field with a competitive salary, so he entered an income-based repayment program to make ends meet, paying $200 per month. How? Time and compound investment returns caused Charlie’s inheritance to grow without him adding a penny.Įxample of how compound interest can dig financial holes:īrandon took out student loans to fund his education, finishing school with $50,000 in student loans at a 7% annual interest rate. Charlie’s investment, despite him not adding any more money to it, was worth almost $150,000 when he turned 62. Warren’s friend Charlie wasn’t able to put away as much as Warren during his career, but he invested a $10,000 inheritance at 22 in the same index fund. The initial $500, and the monthly contributions thereafter, grew to almost $1.2 million thanks to time, compound interest, and Warren’s investing strategy. The index fund returned 7% per year for the next 40 years, when Warren retired at the age of 62. He started investing at 22, adding $500 per month to an account which held an index fund tied to the stock market. Warren recognized early in life that if he routinely saved and invested, he could accumulate wealth and live a better life. However, for those who pay compound interest on loans, it can dig a deep hole that may be difficult to escape.Įxample of how compound interest can help build wealth: In the case of invested assets, it is a powerful tool to build wealth. Compound interest causes principal to grow exponentially over time. Put more simply, it is interest on top of the interest previously added to the principal. What is compound interest and how does it work?Ĭompound interest is interest calculated on an amount of principal (e.g., a deposit or loan) including all accumulated interest from prior compounding periods. This alert discusses the basics of compound interest and the effect it has on your financial future.

It can be a double-edged sword, benefiting those who use it to build wealth, and burdening those who accrue interest on loans and dig themselves into deep financial holes. Don't forget, check out the TD Compound Interest Calculator online.Compound interest has been called 8th Wonder of the World. I'm wishing you and your friend a happy financial journey. If you or your friend are thinking about investing and compound interest, why don't you consider booking an appointment with a TD Personal Banker for some advice on which investments would be suitable for you? Thanks for your interest in compound interest. In general, if you choose to purchase an investment that offers an interest rate compounded over time, the longer the term of the investment and the more frequent the compound calculation occurs, the higher your return could be. You'll see how a small amount of money could grow. To get an idea of how compound interest works, try the Compound Interest Calculator on the TD website. Interesting stuff, right? It's almost like what happens to a snowball that rolls down a hill and gets bigger as it rolls. In addition, the frequency of the compound interest calculation, for example, monthly, half-yearly or yearly, as well as the term of the loan or the deposit, can also affect the total amount of interest payable or earned. So, in very basic terms, compound interest is interest calculated on principal and interest. Compound interest is interest calculated on both the principal amount of money, like a loan or deposit, and on the interest payable or earned on that principal amount. The power of compound interest can be great. Compound Colleen.' You're quite right, Colleen. Compound interest sounds great, right? But my friend needs your help. 'Dear Asking for a Friend, my friend and I keep hearing about compound interest. Welcome to the place where we answer those big questions that your friend really needs advice on.

Compound define finance