How to Earn More Income with Compound Interest

Do you know what compound interest is? How much are you earning in compound interest each month? If you don’t know the answer to these very simple questions you definitely need to keep reading. Compound interest is one of the most important financial concepts you need to know. Nothing Common About Cents will show you how to earn more income with compound interest.

That is why we are taking the time to show you how to earn more income with compound interest. Apologies up front, there are financial concepts, definitions and formulas in this post. However, they are well worth your time and attention.

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What is interest?

Let’s back up and start with, what is interest? According to Investopedia.com, “interest is the monetary charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR). Interest is the amount of money a lender or financial institution receives for lending out money.”

Most of us know interest from our car payment, mortgage or credit card bills.

Continuing with Investopedia, we are going to look at simple interest next.

Here is a video if you prefer:

Simple Interest

“Simple interest is a quick and easy method of calculating interest charge on a loan. Simple interest is determined by multiplying the daily interest rate by the principal by the number of days that elapse between payments.”

If you like to see a visual on the simple interest formula its:

Simple Interest = Principle x Daily Interest Rate x Number of days between payments

Compound (or compounding) interest

Again from Investopedia, “Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.”

You can think of compound interest as interest on interest (and principal) because your earning interest on interest you’ve already earned in previous periods.

The formula for compound interst is:

Compound interest = [Principal x(1+interst)^n]-Principal or

Compound interest = Principal x [(1+interest)^n-1]

n = number of periods

In short, when used effectively compound interest is true passive income and can greatly add to your wealth, not quickly, but overtime.

How much can I earn with Compound Interest

Well, of course, that depends

It depends on how much money you are earning interest on? How often you are adding principal to the amount earning interest? What the interest rate is? How often the interest is compounded? And how long you keep the money in the interest bearing account.

Investor.gov has a fun calculator you can play with to see how much you can earn.

Trust me, this calculator will get you excited about the power of compound interest!

On a side note, Investor.Gov has a ton of free resources for individuals. There are introductions to investing, a ton of financial and savings calculators, mutual fund analyzers, ways to protect your investments and types of fraud to avoid and others. I highly recommend you check them out. Maybe I will do a whole blog post on this site, if you’d like to see it mention it below in the comments.

The Rule of 72

Another cool financial concept to know is the Rule of 72.

This is a simple way to learn how long it will take an investment to double at a fixed annual interest rate.

For example, if I have $1,000 invested at an annual fixed interest rate of 5%, it would take 14.4 years to double to $2,000.

Rule of 72 = 72/5 = 14.4 years

The rule of 72 is not precise. It provides an estimate for how long it will take an investment to double at a fixed annual interest rate.

Where can I earn compound interest

Now that you know what compound interest is, where can you earn compound interest? And how can you earn more income with compound interest?

Typically, you can earn compound interest:

Bank Accounts

• Savings accounts: When you place money in your savings account banks lend out the money and pay you interest on the funds you deposited. Try and look for banks that compound interest daily, as opposed to weekly or monthly. In this current environment of near 0% interest rates, look to online banks for higher rates.
• Money Market accounts: Money market accounts are similar to savings accounts. But allow you to write checks on the funds you deposited and have ATM benefits. They often limit the number of transactions you can make monthly. Additionally, some will charge fees if you balance falls below a certain amount.

Investments

• Zero-Coupon bonds: Zero-coupon bonds are bonds you purchase at a steep discount. The discount serves as interest over time until your bond matures at a predetermined date at face value. There are certain risk associated with purchasing individual bonds that we will not go into here. Typically, it is wiser for individuals to purchase bond mutual funds or exchanged traded fund (ETF’s) rather than individual bonds.
• Dividend Stocks: Dividend stocks are stocks that pay a dividends usually semi-annually. These are generally stocks from mature companies who are returning capital to shareholders in the form of dividend payments. You can instruct your broker to reinvest these dividends to automatically buy more shares of the stock. Like zero-coupon bonds above, it is typically more prudent for individual investors to invest in mutual funds or ETF’s of dividend yielding stocks, rather than purchase individual stocks.

As I am sure you gathered from the above, the place to look for compound interest these days is mutual funds or etf’s of dividend stocks or zero-coupon bonds.

What is a mutual fund or ETF?

A mutual fund is a investment that is made up of a pool of money from many investors to invest in a basket of stocks, bonds, money market instruments or other assets. Mutual funds only trade once a day at the close of the trading day.

The benefits of mutual funds is they are managed by professional money managers. They give individual investors access to professionally managed portfolios and they are diversified because they are a “basket” of investments.

You can find mutual funds of all types: 100% equities (stocks), 100% bonds, any number of mixes of stocks and bonds, some include real estate, commodities, and some are adding crypto investments in them.

Likewise an exchange trade fund or ETF is a basket of securities, like a mutual fund, that tracks a specific index, sector, commodity or other asset.

You can even find ETF’s that are 2x or 3x. Meaning they use leverage to 2 or 3x the traditional returns. There are also inverse ETF’s that are contrarian (or the opposite) of the market. Because these strategies are for advanced investors so I will not cover them here but know they exist.

Unlike a mutual fund, an ETF can be traded at any time during the trading day.

Where to find dividend or bond yielding mutual funds or ETF’s?

Now that we know what a mutual fund and ETF is, how do we go about finding them? Specifically, how do we find those related to compound interest?

You can find screeners for mutual funds and ETF’s with pretty much any brokerage firm you already use for your investments, 401k’s, or IRA’s. Or you can simple Google, “Mutual Fund and ETF screener.

A couple of the key items you would want to filter for are:

• Open to new investment
• Minimum new investment size (some could be $1,000 or more)
• Dividend Yield
• Income Yield
• Fees
• Returns – Focus on long term returns of 5 or more years. Short term returns are irrelevant when you are looking for long-term growth

Of course, these are just a few of the items I would screen for. What is important to you is different than what is important to me. A couple things to think about are risk, fees, time frame.

Risk – you have to be comfortable with the risk you are taking to earn your compound interest. Ask yourself tough questions, make an investment plan, do you de diligence. All these things are in your control.

Fees- fees will kill your earnings more than just about anything. Whether you are looking at savings accounts, money market accounts or investments make sure you know and understand the fee structure. Seek out low or no fee options. They are out there, find them.

MyConstant.com

If making 0.55%-1.0% annual rate of return on a CD is not your idea of compound interest, head over the MyConstant.com. My Constant is a peer to peer lending site that allows you to earn on US dollars or crypto. With My Constant you can earn up to 5x the current rates on CD’s, so get over there today, open an account and get the compound interest rolling in today.

A Final Thought

An additional thought when it comes to the search for compound interest is the cryptocurrency markets.

The crypto markets are highly volatile and you can and will lose money. Due diligence and understanding of the markets is crucial. Therefore, we am not recommending you invest in crypto markets, however, compound interest does exist in the crypto markets.

In the crypto markets it is called staking. Like the savings account mentioned above, you place your crypto currency in an account, your crypto is loaned out to others and you earn interest on your crypto.

Interest paid in the crypto markets can easily be 10x what you would receive in a bank. With the higher interest comes higher risk. As a result, the risk in the crypto markets can easily be 100x, or higher, than what you’d have in a bank.

Yes, we know this is thought crypto staking is vague. We will follow up with more specific crypto posts to include staking at a later date. We just wanted to introduce the idea here.

Thank you so much for reading this post. We hope it will help you to think about how you can earn more income with compound interest. Please let us know if there are more topics you’d like to learn about in the comments below.

Happy Holiday’s and Happy New Year from all of us at Nothing Common About Cents.