Investment Strategy: The Power of Compound Interest
Compound interest has been dubbed the "eighth wonder of the world," but why? Benjamin Franklin used it to create endowments for a major city like Boston.
For those who wish to generate more gain with some more risk, then compound interest is the correct option for you.
Simple interest only generates interest on the principal. In other words, if you had $1,000 in an account and it generated $50 of interest over a year, it would only yield another $50 the next year because it's only earning interest based on that initial $1,000 deposit (a.k.a., the principal). Compound interest, on the other hand, generates interest on both the principal and any interest earned over time.1
While that's great for your savings or checking account, compound interest can also play rough. One example of this that many can relate to is credit card debt. This kind of debt is also calculated with compound interest, but only in favor of the company providing you with the line of credit. As the debt grows and interest is added, the interest is calculated on the total amount you owe, not merely on the initial amount you purchased.
In some cases, compound interest can take your investment further. For example, if you had $20,000 and divided it among two investments—one offering 10% simple interest and the other offering 10% compound interest—you'd see far greater returns over the next three decades with the compound interest investment. The investment offering simple interest would earn you an additional $30,000 over that 30-year period. Meanwhile, the compound interest would earn you an additional $164,494.2
While there are many advantages when compound interest is calculated in your favor, it's also important to remember that not every investment opportunity will provide this option. For this reason, it's important to keep your eye out for these opportunities when they arise. For more information on investment strategies, feel free to contact our team, California Retirement Advisors, at cradivsors.com or call at 888-643-7472 to schedule an appointment to speak with an advisor.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.