5 percent compound interest a good investment

This article was originally published on Sept. The calculator is fairly simple, but it does allow inputs of monthly additional deposits to the principal, which is helpful for calculating earnings where additional monthly savings are being deposited. Popular Courses. The second way to calculate compound interest is to use a fixed formula. Motley Fool Staff.

Compound Interest Formula

Why invest? Investing can provide you with another source of income, help fund your retirement or even get you out of a financial jam in the future. Above all, investing helps you grow your wealth — allowing your financial goals to be met and increasing your purchasing power perxent time. It also means that you inveestment combine investments to create a well-rounded and diverse — that is, safer — portfolio. Risk tolerance and time horizon each play a big role in deciding how to allocate your investments.

Once you learn about the magic of compounding, it’s natural to want to put its power to work building your wealth.

Compound interest or compounding interest is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, the greater the compound interest. Since the interest-on-interest effect can generate increasingly positive returns based on the initial principal amount, it has sometimes been referred to as the «miracle of compound interest. Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one. The total initial amount of the loan is then subtracted from the resulting value. What would be the amount of interest? Using the above example, since compound interest also takes into consideration accumulated interest in previous periods, the interest amount is not the same for all three years, as it would be with simple interest.

How compound interest from investing grows your money faster than anything else.

Why invest? Investing can provide you with another source of income, help fund your retirement or even get you out of a financial 5 percent compound interest a good investment in the future. Above all, investing helps you grow your wealth — allowing your financial goals to be met and increasing your purchasing power over time.

It also means that you can combine investments to create a well-rounded and diverse — that is, safer — portfolio. Risk tolerance and time horizon each play a big role in deciding how to allocate your investments. Conservative investors or those nearing retirement may be more comfortable allocating a larger percentage of their portfolios to less-risky investments.

These are also great for people saving for both short- and intermediate-term goals. Those with stronger stomachs and workers still accumulating a retirement nest egg are likely to fare better with riskier portfolios, as long as they diversify.

Be prepared to do your homework and shop around for the types of accounts that fit both your short- and long-term goals. Below are a range of investments with varying levels of risk and potential return. Certificates of depositor CDsare issued by banks and generally offer a higher interest rate than savings accounts. These federally insured time deposits have specific maturity dates that can range from several weeks to several years.

With a CD, the financial institution pays you interest at regular intervals. Once it matures, you get your original principal back plus any accrued. You may be able to earn up to nearly 2.

But there are many kinds of CDs to fit your needsand so you can still take advantage of the higher rates on CDs.

Risk: CDs are considered safe investments. However, they do carry reinvestment risk — the risk that when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs with lower rates. A money market account is an FDIC-insured, interest-bearing deposit account.

Money market accounts typically earn higher interest than savings accounts and require higher minimum balances. In exchange for better interest earnings, consumers usually have to accept more restrictions on withdrawals, such as limits on how often you can access your money. These are a great option for beginning investors who need to build up a little cash flow and set up an emergency fund.

Risk: Inflation is the main threat. If inflation rates exceed the interest rate earned on the account, your purchasing power could be diminished. Liquidity: Money market accounts are considered liquid, especially because they come with the option to write checks from the account.

However, federal regulations limit withdrawals to six per month or statement cycleof which no more than three can be check transactions. The U. Treasury bills, or T-bills have a maturity of one year or less and are not technically interest-bearing. They are sold at a discount from their face value, but when they mature, the government pays you full face value.

Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years. Holders earn fixed interest every six months and then face value upon maturity.

The price of a T-note may be greater than, less than or equal to the face value of the note, depending on demand. If demand by investors is high, the notes will trade at a premium, which reduces investor return. Treasury bonds, or T-bonds are issued with year maturities, pay interest every six months and face value upon maturity. They are sold at auction throughout the year. The price and yield are determined at auction.

Treasury securities are a better option for more advanced investors looking to reduce their risk. Risk: Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.

You can count on getting interest and your principal back at maturity. However, the value of the securities fluctuates, depending on whether interest rates are up or. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. If you try to sell your bond before maturity, you may experience a capital loss.

Treasuries are also subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power. Because they mature quickly, T-bills may be the safest treasury security investment, as the risk of holding them is not as great as with longer-term T-notes or T-bonds. Just remember, the shorter your investment, the less your securities will generally return.

Liquidity: All Treasury securities are very liquid, but if you sell prior to maturity you may experience gains or losses, depending on the interest rate environment.

A T-bill is automatically redeemed at maturity, as is a T-note. When a bond matures, you can redeem it directly with the U. Treasury if the bond is held there or with a financial institution, such as a bank or broker. Government bond funds are mutual funds that invest in debt securities issued by the U. The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac.

These government bond funds are well-suited for the low-risk investor. However, like other mutual funds, the fund itself is not government-backed and is subject to risks like interest rate fluctuations and inflation. If inflation rises, purchasing power can be diminished. If interest rates rise, prices of existing bonds decline; and if interest rates decline, prices of existing bonds rise. Interest rate risk is greater for long-term bonds. Liquidity: Bond fund shares are highly liquid, but their values fluctuate depending on the interest rate environment.

Municipal bond funds invest in a number of different municipal bonds, or munis, issued by state and local governments. Earned interest is generally free of federal income taxes and may also be exempt from state and local taxes. You can consult with a financial adviser to find the right investment type for you, but you may want to stick with those in your state or locality for additional tax advantages. Municipal bond funds are great for beginning investors because they provide diversified exposure without the investor having to analyze individual bonds.

This results in a loss of future interest payments to the investor. Choosing a bond fund allows you to spread out potential default and prepayment risks by owning a large number of bonds, thus cushioning the blow of negative surprises from a small part of the portfolio. Liquidity: You can buy or sell your fund shares every business day. In addition, you can typically reinvest income dividends or make additional investments at any time. Small investors can get exposure by buying shares of short-term corporate bond funds.

Short-term bonds have an average maturity of one-to-five years, which makes them less susceptible to interest rate fluctuations than intermediate- or long-term. Corporate bond funds can be an excellent choice for investors looking for cash flow, such as retirees, or those who want to reduce their overall portfolio risk but still earn a return.

Investment-grade short-term bond 5 percent compound interest a good investment often reward investors with higher returns than government and municipal bond funds. But the greater rewards come with added risk. There is always the chance that companies will have their credit rating downgraded or run into financial trouble and default on the bonds. Make sure your fund is made up of high-quality corporate bonds. In addition, you can usually reinvest income dividends or make additional investments at any time.

Just keep in mind that capital losses are a possibility. Buying individual stocks, whether they pay dividends or not, is better-suited for intermediate and advanced investors.

Make sure you invest in companies with a solid history of dividend increases rather than selecting those with the highest current yield. That could be a sign of upcoming trouble. Liquidity: Quarterly payouts, especially if the dividends are paid in cash, are relatively liquid. Still, in order to see the highest performance on your dividend stock investment, a long-term investment is key.

You should look to reinvest your dividends for the best possible returns. Just like a savings account earning pennies at your brick-and-mortar bank, high-yield online savings accounts are accessible vehicles for your cash. With fewer overhead costs, you can earn much higher interest rates at online banks. As of Nov.

While high-yield savings accounts are considered safe investments, like CDs, you do run the risk of earning less upon reinvestment due to inflation. Liquidity: Savings accounts are about as liquid as your money gets.

You can add or remove the funds at any time, but like money market accounts, federal regulations limit most withdrawal transactions to six per month. These stocks tend to be made up of tech companies that are growing sales and profits very quickly, such as Alphabet parent of GoogleAmazon and Apple. Unlike dividend stocks, growth stocks rarely make cash distributions, preferring instead to reinvest that cash in their business to grow even faster.

These types of stocks are among the most popular for an obvious reason: The best of them can return 20 percent or more for many years. When investor sentiment turns — when the market declines, for example — growth stocks tend to fall even more than most stocks.

So if you pick the wrong stock, it could become worthless. Liquidity: Growth stocks — like many stocks trading on a major U. Growth-stock funds can be good for beginners and even advanced investors who want a broadly diversified portfolio. Investors can select an actively managed fund where professional fund managers select growth stocks to beat the market, or they can choose passively managed funds based on a pre-selected index of growth stocks.

Either way, funds allow investors to access a diversified set of growth stocks, reducing the risks of any single stock doing poorly and ruining their portfolio. With a fund, the professionals do all the stock selection and management, minimizing the risk that you might select the wrong investments.

However, while diversification prevents any single stock from hurting your portfolio much, if the market as a whole drops, the fund is likely to decline. And stocks are well-known for their volatility.

What to consider

It is only when the interest is actually compoound, or added to the existing balance, that it begins to earn additional interest in the account. What Is Compound Interest? Opting to reinvest dividends derived from the mutual fund results in purchasing more shares of the fund. First start the Visual Basic Editor, which is located in the developer tab. A key feature of most savings accounts is the interest they pay, which will typically be higher than interest you can earn on checking accounts. If we had been able to introduce her to equities earlier, she would have left millions instead of thousands. Your input will help cokpound help the world invest, better! Popular Courses. The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, inveshment greater the compound. Updated: Jun 19, at AM. Growth of Compound Interest.