Compound Interest - The Benefits of Saving at a Young Age

Your grandparents told you to start saving for your retirement at an early age. If you were like most people, you just pushed the idea aside and kept on having fun with your money. When you take a look at compound interest, however, and really understand the concept of how it works, you may get more excited about saving for your future early rather than putting it off.

With compound interest, you start saving money and are paid a certain amount of interest on that amount. As the amount grows and time goes on, you will be paid interest on the initial amount you invested as well as the interest that has already been added to it.

The interest will be applied at specific time intervals. You'll find out what these intervals are when you open up an account. By adding the initial deposit to the interest you'll end up with the compounded amount. Your next interest payment will be based on the compounded total. When it's time for the next interest payment to be paid, you'll receive this interest on the initial deposit plus the two interest payments you have already received. This can go on and on indefinitely unless there is a time limit on the account or savings plan.

If you are able to add money on a regular basis, this will help the compounded amount grow faster. While it may not seem worth while at the beginning when the amounts are low, it can quickly turn into a snowball effect as the interest and your own deposits add up.

It's a good idea to really shop around for the best financial option when it comes to saving money for the long-term. Don't simply assume that the interest rate offered by one bank on a savings account is the same rate offered by other banks. It is the same for GICs and other savings plans that offer compounding interest. Take some time to shop around to find the best rates.

The next thing you'll want to do is find a compounding calculator and work with some numbers. It's easy to find these calculators on the Internet and they'll give you a realistic idea of what you can expect. Work with the figures that you have been provided for savings accounts and other investment plans. Even if you can only save $10 per week right now, it will add up over the years if you stick to your plan. You'll be more than thankful for the effort when you get older. Every small amount that you can put towards your retirement now can make a huge difference in the future.