Compound interest: The gift that keeps on giving
What do you get for the kid who wants everything? The teenager who’s too cool for anything? The college student who doesn’t know what to ask for? Sometimes, cash seems like the safest bet. It’s like a gift they get to open twice — first when they receive it and again when they spend it. But before you stuff a few bills into a card, or load money onto a gift card, consider the benefits of letting it grow in an interest-earning account instead.
Compound interest can turn your gift — holiday, bat mitzvah, graduation, you name it — into one that truly does keep on giving. Each year, the interest it earns gets added to the principal, which earns even more interest. The longer the money stays put, the more it will grow. Someday, when the recipient withdraws the funds, they’ll get an even bigger gift than the one you originally gave.
An intro to interest is the money your financial institution pays you to store your money in a savings or retirement account. There are two types: simple and compound.
To understand the difference between them, it’s important to differentiate between your principal and your account balance. Your principal is only the amount of money you’ve deposited into your account, while your balance is the total amount of money in your account, including interest.
So, if you deposited $100 and earned $5 in interest, your principal is $100 while your balance is $105.
Simple interest is calculated based on the principal, or the amount you deposited.
Compound interest is calculated based on your total balance, including interest you’ve already earned. So even if you make only one deposit in your account, the amount of interest you earn will keep growing.
Why compound interest makes a great gift
While toys and electronics will eventually break or become obsolete, a savings fund with compounding interest just keeps getting better over time. But that’s not the only reason to give the gift of compound interest. Here are three more:
- Nothing teaches kids about the power of saving and investing like watching their own money grow. A high-interest account can create meaningful results — results that could capture the attention of an impulsive youngster who is prone to spending. Your gift could become a catalyst for developing lifelong financial habits.
- It’s easier to save when they don’t have to start from scratch. Creating an account for them, or giving their existing account a boost removes two of the most common barriers to saving: not knowing where to start and the impulse to spend immediately.
- Even a small donation to a savings fund represents an investment in the person’s future. It’s one of the most meaningful gifts you can give. Even if they don’t recognize it right away.
So how do you go about giving the gift of compound interest?
Donate to a college fund: Contributing to a child’s college fund, whether you’re starting one for them or donating to an existing account, is one of the best ways to give their future a boost. The earlier you start, the longer the money has to grow, which makes it an excellent gift idea for young children. But no matter what age you start or how much you’re able to contribute, every dollar counts.
Start an IRA: For kids who don’t need help with college, another option is to start an individual retirement account – also known as an IRA. An IRA makes a great gift for a high school or college student, giving them an early start on retirement savings and decades to build their nest egg. The sooner they get started, the more freedom they’ll have to enjoy their golden years.
Even if you don’t have a specific purpose in mind, contributing to a child’s savings account (or starting one for them) is a gift that will continue to grow over time.
Open a CD: It’s the gift you give yourself! Securely set aside savings for your future adventures. And while you do, watch the interest grow in MyOCCU Online & Mobile.
