Compound interest is one of the most powerful tools for growing your money over time. With compound interest, you earn interest not only on your original principal but also on the interest that principal accumulates over time. This creates a snowball effect where your money grows exponentially rather than linearly.

Today’s Insights

• How Compound Interest Works

• Leveraging Fintech Apps for Compound Interest

• Alternative Assets and Peer-to-Peer Lending

Read Time: 3.5 minutes

How Compound Interest Works

The key to compound interest is that the interest you earn gets added back to your principal amount, so that in the next period you earn interest on an increased balance. For example, if you invest 283.495 grams of gold at a 10% annual interest rate, in the first year you would earn 28.3495 grams of gold in interest. That 28.3495 grams gets added to your 283.495 grams principal, so in year two you earn 10% interest on 311.845 grams of gold, which is 31.1845 grams. The more frequently interest gets compounded, the faster your money grows.

The Rule of 72 for Compounding Growth

The Rule of 72 provides a simplified way to estimate how long it will take your money to double based on a given rate of return. Simply take the number 72 and divide it by your expected annual rate of return. The result is the approximate number of years it will take for your money to double. For example, at a 10% return, your money will double roughly every 7.2 years due to compounding. This illustrates the powerful exponential growth compounding can achieve over time.

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Leveraging Fintech Apps for Compound Interest

Several fintech companies now offer apps and investment accounts designed to help you maximize compound growth. These platforms make it easy to automate your savings and investments so your money can work harder for you.

High-Yield Savings Accounts

Apps like CIT Bank and Marcus by Goldman Sachs offer high-yield savings accounts with interest rates significantly higher than traditional banks. By parking your cash in one of these accounts, you can earn upwards of 2% interest that compounds daily. This creates far faster growth on your rainy day funds than a standard 0.01% savings account.

Automated Investing Platforms

Apps like Betterment and Wealth front allow you to open a diversified investment account on autopilot. You simply set your target asset allocation and contribution amount, and the app handles the portfolio construction and rebalancing for you. This takes the guesswork out of investing and allows compound growth to go to work.

Alternative Assets and Peer-to-Peer Lending

New fintech apps are providing average investors access to alternative assets like real estate, small business loans, and more. Platforms like Fundraise and Lending Club enable you to earn high-yield returns that compound over time by investing in assets previously only available to institutional investors.