Understanding Compound Interest: The Power of Money Growth

Published: May 27, 2024 | Updated: May 27, 2024

What is Compound Interest?

Compound interest is the process where interest earned on an investment is reinvested, allowing you to earn interest on your interest. This creates a snowball effect that can significantly increase your returns over time.

How Compound Interest Works in Money Market Accounts

In money market accounts, compound interest can work in different ways depending on the compounding frequency. The more frequently interest compounds, the more you'll earn over time.

Example of Compound Interest:

If you invest $10,000 at 4% APY:

  • Daily compounding: $10,408.08 after one year
  • Monthly compounding: $10,407.42 after one year
  • Annual compounding: $10,400.00 after one year

Compounding Frequencies Explained

  • Daily Compounding: Interest is calculated and added to your balance every day (365 times per year)
  • Weekly Compounding: Interest is calculated and added every week (52 times per year)
  • Monthly Compounding: Interest is calculated and added once per month (12 times per year)
  • Quarterly Compounding: Interest is calculated and added every three months (4 times per year)
  • Annual Compounding: Interest is calculated and added once per year

The Rule of 72

The Rule of 72 is a simple way to estimate how long it will take for your money to double at a given interest rate. Divide 72 by your interest rate to get the approximate number of years.

Example of the Rule of 72:

At 4% interest rate:

72 ÷ 4 = 18 years to double your money

Maximizing Compound Interest

  • Start investing early to take advantage of time
  • Choose accounts with higher compounding frequencies
  • Reinvest interest rather than withdrawing it
  • Look for accounts with competitive interest rates

Using Our Calculator

Our Money Market Calculator can help you understand how different compounding frequencies affect your returns. Try different scenarios to see the impact of compound interest on your investment.

Pro Tip

When comparing money market accounts, always look at the APY rather than just the interest rate. The APY takes into account the compounding frequency and gives you a true picture of your potential returns.