Financial independence is always the top priority. Unawareness to your financial situation, especially during the COVID-19 pandemic, is life threatening hence the theme of today’s article, compound interest. Compound interest, or ‘interest on interest’, refers to the amount of interest paid on the principal (original dollar amount) in addition to the accumulated interest over a period of time based on a daily, monthly, or annually basis. Banks pay us in the form of divends for simply choosing to place our money in their institution. Higher interest rates indicate how much more money is paid back.
Time is a very important term when utilizing compound interest. The compounding frequency and investment duration correlates to how much growth occurs. Credit card companies implement this strategy upon cardholders with exponentially growing debt on a neglected balance. Why not pay yourself instead of making other people rich? Here are options providing the opportunity to do nothing but watch those dollars earn themselves.
High Yield Savings Account
A high yield savings account in the simplest terms is an account sharing similar benefits to a normal savings accounts while offering much higher interest rates. Account holders can access funds via ATMS and electronic transfers with a minute fee when the monthly limit for withdrawals is reached. Interest rates can change to the banks discretion is the only major drawback. Online banks tend to offer better options and are very competitive so shop around before making a decision.
Money Market Account
MMAs and high yield savings accounts can be confusing because of their similarities. MMAs differ by offering ‘tiered rates’, requiring a larger initial deposit based on the bank, and permitting holders to write checks in addition to ATM/electronic transfer access much like savings accounts. Tiered rates are better interest rates available to holders maintaining higher balances within the institution. Another quirk may include a premium interest rate offered if holders hit a monthly minimal deposit regardless of the balance. If the balance minimum drops, or the monthly deposits cease, the interest on the account suffers accordingly at the bank’s discretion.
Certificates of Deposit
CDs aren’t savings accounts; more like investments due to the limitations associated. The holder must allow account maturity before the funds are available for reallocation or acquisition. Higher interest rates than others (money market and high yield savings) at a fixed rate; however if the cd hasn’t matured, greater penalties are inquired for early withdrawals. Depending on the type of CD, penalties may take large portions of the principal investment resulting in a loss. If the stipulations are followed, these are excellent passive income utensils.