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Daily Banking

The power of compound interest

February 3, 2023
4
min read

Compound interest allows you to grow your savings exponentially. We’re showing you how your money can multiply year after year.

Man looks at investments on phone and laptop

What are your long-term savings goals? Whether it’s buying a home, traveling the world, or planning for your retirement, you need a savings plan that helps you reach them.

If you start saving now, you have the power of compound interest on your side. It’s one of the most powerful tools you can use to grow your money.

To unpack that, let’s review what interest is.

If you open a savings account, interest is what your financial institution pays you. You earn interest because the financial institution is technically borrowing your money.

If you owe money on your credit card, car, or mortgage, interest is what you pay to borrow that money. For as long as you owe money, you’ll pay interest on the outstanding balance.

Depending on your financial situation, interest can work for or against you.

We’re exploring how you can use compound interest to grow your savings exponentially. A little bit goes a long way!

Simple Interest VS Compound Interest

With simple interest, you only earn interest on the principal—in other words, the money in your savings account.

With compound interest, not only does the principal earn interest, but the income you accumulate earns interest, too. Essentially, you’re taking the interest you accumulate year over year, and reinvesting it to generate even more interest.

The difference is small at first. But as the years go by, compound interest has a snowball effect, and your savings will skyrocket.

Examples of Compound Interest

To illustrate how powerful this can be, we’re going to show you examples of each. These numbers go to show that compound interest is an incredibly powerful way to grow your savings.

Scenario 1:
One-time
Contribution

Simple Interest
You open a high interest savings account with an annualized interest rate of 3%

You put $1000 in your account—this is the principal amount

You make a one-time deposit without any monthly contributions

Every year, you earn $30 in interest

20 years later, you have $1600 in your account

You’ve generated $600 of simple interest
Scenario 1:
One-time 
Contribution

Compound Interest

What happens when we take the same scenario, but factor in compound interest?

After 20 years, you’d have $1820.75

That means you generated $820.75 in interest

Thanks to compound interest, you earned $220.75 more than you would have with simple interest alone
Scenario 2:
Monthly
Contributions

Simple Interest
In Scenario 2, your initial deposit is the same: $1000

You open a savings account with an interest rate of 3%

You contribute $100 every month (totaling $1200 annually)

After 20 years, your account balance would be $32,770

You generated $7770 in interest
Scenario 2:
Monthly
Contributions

Compound Interest
Here’s what happens with an account that compounds monthly:

After 20 years, you'd have $34,733.03

Your total interest earned would be $9,733.03

You earned $1,963.03 more through the power of compound interest!

Use Compound Interest To Your Advantage

To reap the benefits of compound interest, make note of the following:

  • The sooner you start saving, the better. With the examples above, we’ve shown you how time plays a key role in the effects of compound interest. As your interest compounds year over year, your earnings multiply.
  • Try to contribute each month. Even small contributions can make a big difference in the long run. Try to contribute part of your earnings to a savings account each month. It will pay off down the road!
  • Shop around for the best rates. Not all savings accounts are created equally. Naturally, you want one with the highest annual percentage yield (APY). This is the interest rate after the compounding frequency is factored in. You should also look at the number of compounding periods. An account that is compounded daily will earn more interest than one that is compounded annually. Search for a savings account with a high interest rate and frequent compounding periods.

Ready to open a high interest savings account? With a Cambrian Premium Savings Account, interest is calculated daily and paid monthly—and that translates to serious savings.

Compound Interest & Debt

Unfortunately, compound interest can work against you, too. This applies to any loans or debt you have with a high interest rate.  

If your loan has a high interest rate—for example, a large outstanding credit card balance—and it will take multiple years for you to pay it back, compound interest means you’ll end up repaying a much larger sum than you initially borrowed.

By consolidating your debt with a personal loan, you can get a lower interest rate and pay it off sooner.

You can save thousands that you would’ve paid in interest with a Cambrian PayOff loan. Try our PayOff Debt Calculator and see the difference for yourself!

Start Using Compound Interest To Your Advantage Today

We’ve stressed the importance of saving early—but it’s never too late to start. Let’s work together to make your money work for you.

To learn more, visit a Cambrian Credit Union branch in Winnipeg or Selkirk today!

Today’s Rates

*All rates and yields subject to change without notice.
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