15 Feb Compounding Your Savings
Banks have the sole aim to make profits as it helps individuals get easy access to money. It also works well in helping those who wish to save and grow their money. It does this by helping you manage the flow of the money that you earn and that which you spend. The savings accounts offered by the banks are usually aimed at helping customers grow their money. This is what usually happens with those who choose to compound their money through banks.
Compounding of your money simply refers to the use of banks to make savings that will earn you either simple interest or compound interest. When you compound your money with a bank, you can either earn simple or compound interest on the savings.
How does simple interest work?
Simple interest is usually added once a year in your account. The agreed upon percentage is calculated against your account balance to determine the amount that you will be awarded. If you had put an amount totaling to £500, you will earn the same amount in interest annually over the years despite the increase in the balance due to the interest earned. The interest can simply be put as money earned on the balance you had originally saved to the account.
How does compound interest work?
When you select compound interest, the money earned is calculated against your savings at that particular time. The interest is calculated against your total balance. If you have earned any interest earlier, this amount is also included as part of your total balance and is used in calculating your next interest earning. With compound interest, your interest earnings increase on an annual basis.
The compounding frequency usually differs from one bank to another. While some may do their compounding monthly, others do it semi annually while others annually. The banks which offer frequent compounding usually help your savings to grow faster. As long as you keep your savings stashed in the account for longer, you may end up earning the same amount you had put away as savings in terms of interest especially when using compound interest.