On your path to achieving financial literacy, you will notice the term compound interest used a lot. It’s especially relevant as you start building your emergency fund in a high-yield savings account and investing for retirement. Compound interest is the magic that happens when you earn interest on your original investment plus the interest you’ve already made. Essentially it’s earning interest on interest. So, your money grows faster and faster over time.
As you can see, the secret sauce to compounding interest is time. The longer you let your money sit, the more it will make.
Some things to note…
- Interest rates are variable. Meaning they change based on economic conditions. Currently, interest rates are high, which is excellent for your HYSA (and not so great if you are trying to borrow for a car or home).
- Compounding interest is a double-edged sword. If you owe money with compound interest, like on a loan or credit card, it can work against you. The amount you owe can get bigger faster, too. So it’s essential to be aware of both sides of the coin.
Conclusion
Compound interest is basically a way to make money from money. The more money you put in a HYSA and the longer you leave it there, the more interest you can earn. It’s a way to make money while you sleep!
