The more financially secure you become, the more you can afford to make your money work for you. An excellent way you can build on your success is by taking advantage of compounded interest – an important savings tool that can help your savings grow. We’ll break down what you need to know about compounded interest, what it is, how it works, and what it can do for you.
Interested in opening an account with compounded interest? Contact a Union Trusted Advisor to learn more.
Compounded Interest Basics
Compounded interest is interest calculated on the initial principal and also the accumulated interest of previous periods of a deposit. The interest that you earn is reinvested rather than being paid out. With a greater return than a simple interest amount, utilizing compounded interest is a great way to watch your investment grow.
How Does it Work?
While the definition of compounded interest may sound complex, the practice is fairly simple. A good way to understand the concept is with an example. Let’s say you have $500 in an account that utilizes compounded interest. The first time you earn interest on that $500, the interest you get is a percentage of that $500.
However, the next time interest is due, the interest is a percentage of the $500 plus however much interest you earned last time. So if you earned $10 in interest initially, this time the balance of money you are getting interest on is $510. Essentially you are earning interest on your original amount and on the interest, which is why it grows faster than simple interest. Simple interest is calculated only on the principal amount, so you would just continue to earn interest on the original $500.
The rate compounded interest accrues at depends on the frequency of the compounding; the higher the number of compounding periods, the greater the compound interest.
Let’s use our earlier example to explain. The compounded interest on $500 compounded at 10% annually will be lower than that on $500 at 5% semi-annually over the same period of time. The basic rule is that the higher the number of compounding periods, the greater the amount of compound interest.
Compounded Interest Accounts
Now that you understand the fundamentals of compounded interest, learn more about the Union accounts that offer it and start growing your money today.
Certificate of Deposit
A Certificate of Deposit (CD) is a fixed-term deposit to the bank. You agree to give the bank an amount of money for a specific amount of time and in return, the bank pays compounded interest on that money. CD’s can last for varying amounts of time, depending on what best suits your needs. It’s important to remember that once you put money into a CD, it stays there for the duration you agreed upon. Withdrawing your money early comes with penalty fees.
Interested in a Certificate of Deposit? Check out the Union Certificate of Deposit rates.
Money Market Accounts
A Money Market account works a lot like a savings account – but with a higher interest rate. The reason a higher rate is offered with a Money Market account is that they require a higher minimum balance. Money Market accounts may also limit the amount of transfers or withdrawals you can make in a month.
Interested in opening a money market account? Apply for a Union Money Market account today.