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Compound Interest: How to use the most powerful tool for your finances

Team JAR
October 27, 2022
Compound Interest: How to use the most powerful tool for your finances

Compound interest or more precisely, the ‘interest on interest’ or ‘double interest’ strategy is a gamechanger in the field of finances. Who wouldn’t want to earn more interest? Surely, we all desire that and compound interest makes saving plans astonishingly profitable. 

For someone who is lagging behind in saving for the future, the compound interest strategy might draw exceptional cards in your financial favour. The mechanism through which this works earns you more interest than what a simple interest would. 

For long term investment or saving plans, it is the gospel boon to retire with a financially strong background. While it secures your future, it also gives you an edge over others by enabling you to spend a decent amount and yet save profoundly. 

So, how to use this powerful tool and secure your back financially? 

Start early, save dearly: The ultimate solution to saving problems

Compound interest is a fantastic booster for your savings. It is often said that the earlier you start saving and investing, the better the returns.By starting early, you give more time to your money to grow itself and for an extra catalyst effect, compound interest does wonders. The mix of starting early and keeping compounding as the base is the ultimate golden rule to grow your savings and let your money work for you. 

The reason why people might be lagging behind in savings is that they might be high on procrastinating savings plans. The best time to start is now! Postponing savings till your 40s or 50s is surely meant to give you pain after retirement. The best results of compounding will also be more visible if you give it time to do its wonders. 

The hassles of impatience are what drown all future plans. So, with a proper compounding strategy, the time and early start is also what you will need to reap the sweetest fruits off the tree of compounding.  

Compounding leads to exponential growth of money put up for savings

What wonderstrucks us about the concept of compound interest is that it helps in not just a mere simple growth, but, an amazing exponential growth to your money. The interest that gets compounded on your principal amount becomes the pioneer of this exponential growth when interest gets calculated over it. This exponential growth is the reason why our savings deserve the heavy dose of compounding to grow themselves. 

Since compounding increases the rate of savings in just a small amount of time, think what it can do if given enough time!  Compound interest surely thickens your savings. There are many ways to save and invest, but compound interest strategies stand above them all. The way this double interest strategy works not only thickens your savings, but also expands them. This is through the addition to the principal amount. 

Therefore, for anyone looking for a credible way to boost savings, the best way out is to start saving in the shade of compound interest and letting compounding do its wonders.

A mix of compounding with the golden 50/20/30 rule of budgeting by Senator Elizabeth Warren

We find the mention of this golden rule of budgeting in Senator Elizabeth Warren’s celebrated book, “All Your Worth: The Ultimate Lifetime Money Plan”. In simple terms, this rule states that in order to boost your savings and to make yourself start saving, you divide your income in three parts. The first 50 percent should go into expenditure on ‘needs’. The next 30 percent is to spoil yourself and should be spent on your ‘wants’. The remaining 20 percent of your income is to be protected from all desires and must be secured into savings. 

This kind of bifurcation of your income and proper allotment to each area will make you spend less, more precisely, in controlling your  miscellaneous expenditures. With proper assignments of these ‘financial baskets’, there is a certain incentive not to spend more than that. Which is a good habit to follow.

It is the last 20 percent that is of our interest here. With the use of precise compounding, we can grow this last 20 percent by manifolds. Several financial institutions provide lucrative offers of compound interest schemes. The higher the interest rate, the better the returns on savings.

Read the detailed blog about 50/20/30 rule here.

Eliminate withdrawing too often from your savings account

While setting up a saving plan is not as difficult, it is the consistency in saving that plays a huge role in making or breaking your smart saving goal. It is always better to use some saving features that discourage you from withdrawing  from your account too often. In such cases, a savings account plays this role. While it lets you withdraw some amount, it discourages you to do so frequently by deducting some amount as a penalty for withdrawing above the set limit or times. 

If we compound these accounts, the savings would rise by manyfolds. A desired saving plan must constitute a savings account that discourages frequent withdrawals and a set compound interest strategy. 

What wonders compound interest is capable of can be understood better from the example of Warren Buffet. Being considered one of the most successful investors of this time, he thanks the compounding rules for his success in the world of investment and savings.  

Nonetheless, behind these success stories lies a long journey of consistent savings, short term and long term smart saving plans and little everyday goals and some self rewarding to keep the saving motivation high. 

We can conclude the mantra to the perfect saving plans with the following things: a set strategy of clearly defined short term and long term goals, a designated account exclusively devoted to savings, regular and frequent deposits into savings accounts and a perfect compounding on top for some extra dose of boost.