Investing for the Future - The Power of Compound Interest

Compounding interest is a powerful tool for achieving long-term financial success. Compounding interest is a concept that allows you to earn interest on the money you invest and on the interest you have already earned. When you take the time to understand how compound interest works, you'll see how it can be used to your advantage to help you grow your savings and build wealth over a period of time.  

What is compound interest?  

Simply put, compound interest is the process in which your money grows exponentially when reinvested over time. Essentially, it's a way of earning interest on your interest. 

When you make an initial investment, that amount will earn you a certain rate of return. With compound interest, however, your original investment plus any accrued interest will also earn interest. This means you’re earning money on both your initial investment and the money you’ve already made from it. Over time, this effect can significantly increase the total return on your investment.   

For example, if you invest $1,000 at a 5% annual return rate, you will have $1,050 in your account after one year. If you then reinvest that $1,050 at a 5% rate of return, you will have a total of $1,102.50 in your account after two years. That's $52.50 more than if you had just invested the $1,000 once.  

Why is compound interest important?  

Compound interest is a very powerful tool when it comes to investing for the long term, as it allows you to quickly grow your savings without having to continually add more funds. This is especially beneficial when it comes to retirement savings, as compound interest has been proven to be one of the most reliable ways of achieving financial security in the future. In fact, by starting to invest early and often, investors can be sure that their money will be working for them for many years to come.    

Another key benefit of compound interest is its ability to help combat the effects of inflation. When inflation minimizes your money's purchasing power, investing in assets with a high rate of compound interest can help counterbalance your losses.   

How can I take advantage of compound interest?  

There are a few steps you can take to take advantage of compound interest.  

First, determine how much money you can invest each month. This should be based on your budget and goals. If you’re investing for retirement, you may want to increase the amount over time as your income increases.  

Second, decide where you want to invest your money. You may want to invest in a high-yield savings account, such as F&M Bank’s Direct Savings Account. Other investment options include stocks, bonds, mutual funds, or other vehicles. Consider how long you plan to invest and your risk tolerance when making this decision.  

Third, open an investment account with F&M Bank and meet with one of our expert investors. You will need to provide some personal information, such as your name, address, and Social Security number. F&M offers accounts with no-to low fees and commissions. We encourage you to meet with an F&M Investments Financial Advisor to better understand your investment options.  

Fourth, set up automatic investments into your account each month. This way, you don’t have to remember to make a manual deposit each time.  

Finally, track your progress. Monitor the performance of your investments and make adjustments as needed.  

What are some other benefits of investing early?  

Aside from the long-term power of compound interest, investing early also allows you to start taking advantage of compounding even sooner. In other words, the sooner you start investing, the more potential for returns.   

The earlier you start investing, the more time you will have to adjust and recover from any short-term losses. With a longer investment timeline, you can also consider taking on higher-risk investments that may offer higher returns. This gives you the opportunity to make larger gains over time if you’re comfortable taking on more risk. Of course, be sure to consult with one of our financial advisors first for advice.   

Grow Your Nest Egg for the Future  

Investing in the future is an essential part of financial planning, and understanding the power of compound interest can help you make wise decisions.  
  
Reach your financial goals faster. Explore F&M Bank savings accounts and get in touch with a local banker today.