What’s poppin’ gang! Let’s keep it real, we know starting a savings account on your own can be hard, especially when you got those 420 munchies and need a mid night snack. You got no cash in ya wallet but that 200$ in your savings is looking like easy prey. Well watch it because why use that money now when you can let it sit and cook in that savings account to get more cash later. We’ve all heard about interest and what it can do, if not you can get all the deets here (hyperlink), but compound interest is a whole other thing so pay attention!
Compound interest is what happens when the interest you earn on savings begins to earn interest on itself and when that interest be growing, it be SHOWIN!
Let me shoot the shit on how it works with an example:
Imagine you contribute $1,000 to a hypothetical investment that earns eight percent annually. After the first year, your balance is $1,080, you heard?
Now, the next year, you add another $1,000 and earn eight percent again – not only on your adding some cash (called the “principal”) of $2,000, but also on the interest from the first year ($80).
We trying to break it down easy, because math ain’t nobody’s favorite subject and if they say it is, they’re lying.
Here’s the math for that second year for all you visual learners:
- Starting value is $1,080 (your principal and interest from Year 1)
- + $1,000 (your Year 2 principal contribution)
- = $2,080 (Year 1 total + Year 2 principal)
- + $166.40 (8 percent of $2,080, your Year 2 interest)
- = $2,246.40 (your new total balance)
The Results?
If you have $1,000 at a 2% interest rate compounded every year, you’ll earn $20 interest in the first year, and $20.40 interest in year 2, since now you have $1,020 in your account after the first year.
That’s why they call it compound cause your money deadass just be growing, no matter what you put in, whether it be the compound interest or what you had deposited from the start. So stop stressing and do some investing, and stack that bread!
