What Millennials need to know about compound interest
Let your money work for you with the magic of compound interest. Here’s what you need to know about the simple yet powerful wealth-building tool.
Whichever way you look at it, the economic situation is tough — especially for Millennials in emerging markets. Unprecedented levels of student loan debt are preventing many from attaining homeownership. On top of that, data shows that global inflation and a rapidly rising cost of living is hurting Millennials’ ability to save.
Cenoa Co-CEO and co-founder, Seçkin Çağlın, has witnessed this firsthand and spoke about it at the recent Avalance Summit. “I’ve seen multiple cycles of inflation in my country and around the world, and it always comes back.” This is why it’s so critical to Çağlın that Millennials are aware of all the tools at their disposal that can help fight inflation and build long-term wealth, chief among them compound interest.
What is compound interest?
Compound interest is the interest you earn on interest itself. Compounding interest is not to be confused with simple interest, which is the interest calculated based on a principal amount of money.
When it comes to saving money, compounding interest is more advantageous because it builds not only on the principal amount of money invested, but also upon the previously accumulated interest.
For Millennials who have many years of savings ahead of them, compound interest should be a key part of their long-term wealth building strategy. As we’ll demonstrate in a real-life example, even small amounts of savings will add up to major returns.
How does compound interest work?
Let’s use the compounding investment formula to show the magic of compound interest.
A=final amount of principal and interest
P=initial principal balance
n=number of times interest applied per time period
t=number of time periods elapsed
Let’s say you invest $100 in a DeFi Superwallet that earns a 5% annual percentage yield and plan to contribute an additional $100 a month moving forward. For this account, interest compounds monthly across 10 years. By the end of the 10 years, you would have $15,692.93 saved.
On the other hand, let’s say you saved that $100 a month in a checking account. At the end of the 10 years, you would have $12,100 saved. While this is a fine amount of savings, it’s over $3,500 less than you would have earned with the DeFi Superwallet account.
This is the power of compound interest.
Compound interest is most powerful when combined with the advantage of time. Let’s say you want to invest $100 a month and contribute $100 on a monthly basis, but you plan to leave it untouched until you’re able to retire in 40 years. With compound interest, the future value of your savings balloons to an incredible $153,337.86.
However, suppose you waited 10 years to start saving and invested $100 a month on a monthly basis at 5% yield. After saving for 30 years, the future value of your savings would amount to $83,672.64. By missing out on 10 years of compound interest, your future value would amount to a little over half of what you could have earned.
Again, this is the power of compound interest. With time on your side, you can turn a small initial investment into a significant return.
What are the best compound interest accounts?
To make the most of your money, research accounts that will help your investment grow with compound interest. The best compound interest accounts are ones who have fair yield rates, reasonable minimum deposit amounts, and offer high levels of security.
DeFi savings apps
Many traditional financial institutions make it more expensive than necessary to buy and hold U.S. dollars. Enter DeFi (decentralized finance) savings apps like the Cenoa’s Super Wallet. These products offer users the ability to save money in digital dollars in the form of stablecoins with a fixed yield of 5%. The beauty of these savings apps is that they cut out the middleman so they can charge zero fees. According to Çağlın, “Inflation and devaluation is huge in emerging markets… and that’s where we (Cenoa) come in, we are a non-custodial wallet but we make it streamlined and super simple to hold and buy stablecoins.”
Certificates of deposit
Certificates of deposit (CDs) are a type of savings product that allow users to earn interest on a lump sum for a fixed period. Unlike other savings accounts, the money cannot be moved for the period of time, otherwise the user risks a penalty or lost interest. According to an April 2023 FDIC report, the average rate for a 12-month CD was 1.54%. The minimum deposit amount depends on the terms of the bank or credit union offering the CD.
Money market accounts
Money market accounts (MMAs) offer a wide range of interest rates for users, falling anywhere between 0.01% and 3.45% APY. These accounts offer users the ability to write checks or make a set number of debit card transactions every month, making the money more accessible than a traditional savings account.
Start building long-term wealth with the magic of compound growth
With a small upfront investment and time on your side, you can grow your savings exponentially with compound interest. Making interest on your interest could turn into huge savings down the road. Additionally, because it grows your money faster than accounts that earn simple interest, compound interest can help reduce effects of inflation, like rising costs of living.
There’s no way around it, Millennials around the world have inherited a tough economic situation. However, with the help of compound interest accounts like DeFi Superwallets, young folks have the chance to make the most of their money and build long-term wealth.