Best Compound Interest Investments – Grow Your Assets
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If you want to build a comfortable retirement fund, you need to understand that it will not happen overnight. It will take planning and a lot of time. Once you play your cards well, you can have enough money to enjoy your retirement and make the most of the golden years.
But, to reach there, you need to do a lot of preparation and nobody achieves their financial goal without preparation or parking their funds in the right places. Investing is the push that will help grow your wealth in the long term so that you do not have to waste your golden years worrying about income. The best way to invest your money and generate wealth is through compound interest investments. You will find many types of investments that can help boost your savings and grow your wealth.
Compound interest investments are assets or bank-type investments that grow over time. There is a process where the asset’s earnings in the form of dividend payments, interest, or capital gain are reinvested to grow your money. They are assets that earn money and this money is then put back for a larger, longer-term payout. Your fund will be calculated including the initial investment and it will accumulate. So, instead of earning returns through linear growth, there will be an increase in the value of the investment because of the interest on the principal and the accumulated interest. This way, when the investment grows, the money will compound and bring more capital to the nest egg. It could be long-term or short-term, based on how much risk you can take and you will receive a decent return on the investment.
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How does compound interest work?
Compound interest is a way of earning accrued interest on the investments and reinvesting this interest back in the initial investment. It is basically interest on interest. Returning the accrued interest in the investment will allow your money to grow at a faster pace. So in effect, you are not only making money on your investment but also the previous earnings. With time, compound interest can have a huge impact on your net worth. Compound interest is ideally for the long-term and it is very different from simple interest.
Let us take an example here. Assume you invest $1,000 every year at an interest rate of 5%. So in your first year, you will earn $50 and your holding amount will be $1,050. Now, in the second year, you do not earn interest on the $1,000 but you earn on $1,050, which will be $52.5. This means you will make more this year than before. It will continue to keep adding and your interest will continue to grow. The investment can grow exponentially over time if you have a positive rate of return.
Never underestimate the power of compound interest since it works wonders and the longer you let it work for you, the higher will be its future value. This is why it is important to start saving for retirement as soon as you can. Even if you cannot afford to make a huge investment every month, you can start investing consistently over time to build a strong portfolio based on your financial goals.
Overview of the best compound interest investments
Investment | Best For |
High-yield savings account | Low-risk investment |
Individual stocks | Massive return potential |
Certificate of Deposits | Low risk-stable income |
Real estate | Massive revenue growth potential |
Bonds | Higher interest rate than savings account |
Treasury Securities | Minimal risk |
Exchange-traded funds (ETFs) | Low volatility and stable returns |
Mutual funds | Steady income potential |
Retirement accounts | Low risk, stable returns |
Real Estate Investment Trusts (REITs) | Consistent return with low responsibility |
Money market accounts | Highly safe and liquid |
Alternative investments | Great long term potential |
Best compound interest investments
High-yield savings account
If you are looking for short-term investments, a high-yield savings account can be a good choice. The account offers a higher interest rate as compared to a traditional savings account and has similar liquidity to cash deposits. The only downside is that the interest rate can change. So even if you get the best interest rate, it could drop over time. Hence, watch out for the rates offered by the bank.
A high-yield savings account is a safe option but you must understand the fees for using the bank account features. It also offers safety and liquidity, making it a good addition to your investment portfolio if you do not want to take a lot of risks. The account is ideal for the money you want to use in the next three to five years. You can add money, and gain interest.
Individual stocks
Investing in the stocks of a company is owning a piece of the company which will increase in value with time. This means as the company grows, so does your investment. If you invest in dividend stocks, you enjoy passive income in the form of regular dividends from the company. It will give you an immediate return on the investment.
You only need to open an investment account with a brokerage to invest in stocks. You can also automatically reinvest the dividends and grow your investment with time. Stocks can compound over time and grow your wealth. There is no guarantee that the stock will increase in value but if you hold on to them, there is a high potential of making money. You can also invest in fractional stocks if you do not have the funds.
Certificate of Deposits
A very safe investment, certificates of deposit offer higher annual interest rates than a savings account and they are issued by the banks. They have insured time deposits and pay regular interest at specific time intervals. Once they mature, you receive the initial investment and the interest but your money will remain tied up in the CDs till the account reaches maturity.
Real estate
Real estate is an investment that has been here for years. It is an ideal way to build wealth over time and it will pay off in the long run while generating rent income throughout the course of holding. If you want stability and enjoy a hands-on approach, you can consider buying and holding a property. But it involves a lot of activities right from owning the property to handling repairs and screening the tenants. Even if you do not use it as a rental property, it will grow in value over the years and will generate a solid return.
Bonds
Bonds are a great choice for compound interest investments. However, you need to be very careful before you buy one. Different bonds have different risk factors. The government bonds have the lowest risk while the corporate bonds have a high risk since they are issued by corporate organizations. They are only backed by the corporation and one cannot predict what will go on in the year.
Bonds can offer consistent income and they have high liquidity. Further, the state issues municipal bonds which have a slightly higher risk as compared to Government bonds. You must remain very cautious with the bonds you choose and keep the risk tolerance in mind. Once you buy the bonds, consider reinvesting the interest income to continue to grow your wealth.
One place for all your investing
Options Trading
- Get up to a $0.18 rebate
- No commission or per-contract fees
High-yield cash
- Earn 5.1% APY*
- No fees. No subscription required.
Bonds
- 6% Yield or more
- Explore thousands of bonds yielding 6%+
Treasury Securities
There are times when the government needs money to pay debts and they issue treasury securities to raise the money. They are sold at face value and you receive the full value at the time of maturity. It is important to hold them until maturity, otherwise, you could end up taking a loss.
Exchange-traded funds (ETFs)
An exchange-traded fund or ETF is an investment that tracks a particular index like the S&P 500. It will follow the value of the index as it moves up or down and will reflect on the underlying value of your ETF. You can buy ETFs in the stock market during regular market hours and there are several types to choose from. The low-cost investments can help achieve diversification in your investment portfolio while growing your wealth. They will pay dividends when the underlying stocks are paid dividends. However, you need to be careful when choosing the ETFs to invest in and if you need assistance, you can speak to a financial advisor.
Mutual funds
Mutual funds invest in stocks, securities, or bonds and they are managed by professionals who pool money from different investors. They trade on the stock exchange just like individual stocks and their prices fluctuate throughout the day. Mutual funds are safer than stocks since they invest the amount in multiple companies and they are actively managed by professionals. They generate dividend income and show capital growth over time. Since mutual funds are dependent on the stock market, the price of the fund will move with the market.
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Retirement accounts
Known for tax benefits, can work to grow your wealth over time. The contributions you make will continue to grow and the power of compounding will help build wealth. Your account earns interest on your contributions and this interest will continue to accrue on the previous earnings. Hence, you earn interest on interest which makes retirement accounts very important for any investment strategy.
It helps to calculate the annual percentage yield (APY) on your IRA to understand the benefits of compound interest. Even a small investment can add up over time. That said, Roth IRA offers tax-free withdrawals and tax-free growth during retirement.
Real Estate Investment Trusts (REITs)
For those who want to put their money in real estate but do not know how to get started, real estate investment trusts (REITs) are a great choice. The trust is a company that holds and operates real estate and will invest in anything from commercial buildings to shopping malls and housing complexes. They will pay you regular dividends and you will not have to worry about handling the property.
Money Market accounts
You can invest in a money market account which is similar to a savings account and offers a higher rate of interest than the traditional savings account. It also offers high liquidity as compared to certificates of deposits. However, the return on investment will be lower as compared to the other dynamic investment options like stocks and mutual funds. MMAs have a minimum balance requirement to keep the account functioning. It is a good option for those looking for a relatively safe and high-interest account than what’s offered in the basic savings accounts. However, it does not offer as much liquidity as a checking account does.
Alternative investments
Lastly, alternative investments are investments other than stocks, index funds, bonds, etc. They include collectibles, gold, fine art, wine, and more. The investment carries high-risk reward criteria and it is hard to predict how much money you can make or whether the investment is liquid or not. Gold is a safer and highly liquid alternative investment that is attractive and can work as a hedge against inflation. Beginners should only allocate a small amount of their portfolio towards alternative investments.
One place for all your investing
Options Trading
- Get up to a $0.18 rebate
- No commission or per-contract fees
High-yield cash
- Earn 5.1% APY*
- No fees. No subscription required.
Bonds
- 6% Yield or more
- Explore thousands of bonds yielding 6%+
Best compound interest investments
Investment | Risk | Liquidity |
High-yield savings account | Low | Moderate |
Individual stocks | High | High |
Certificate of Deposits | Low | Low |
Real estate | Low | High |
Bonds | Low | Low |
Treasury Securities | Low | High |
Exchange-traded funds (ETFs) | High | High |
Mutual funds | Moderate | High |
Retirement accounts | Low | Low |
Real Estate Investment Trusts (REITs) | Moderate | High |
Money market accounts | Low | High |
Alternative investments | High | High |
One place for all your investing
Options Trading
- Get up to a $0.18 rebate
- No commission or per-contract fees
High-yield cash
- Earn 5.1% APY*
- No fees. No subscription required.
Bonds
- 6% Yield or more
- Explore thousands of bonds yielding 6%+
FAQs
Can you become rich with compound interest investments?
Yes, it is possible to build wealth through compound interest investments. It can make you rich but there are some things you need to keep in mind. You must start investing as early as you can. Investing in your twenties is a great idea as compared to investing in your mid-thirties. This decision will pay off in the long haul. That said, you do not need a huge amount to get started. You can begin with whatever you have and invest the money in investment options that have high returns like stocks and mutual funds. Consider your requirement for passive income and look for dividend payments. Lastly, avoid the temptation to liquidate the investment or sell the stocks once they have gained 20% or 30%. The idea of compounding is to stay in it for the long run and if you can do that, you will see your wealth grow. With patience and time, you can become rich with compound interest investments.
How should I start investing as a beginner?
As a beginner, it is important to park your money in the right investment accounts. Start with a 401(k) and contribute to it regularly. Next, invest a part of your money into individual stocks or mutual funds. They have high growth potential for the long term. Remember, do not panic sell and choose the right growth stocks to invest in.
How long should I wait for the investment to double?
There is no set time within which your investment can double and your goal should not be doubling the investment. If you do not need the money immediately, let it grow and it could more than double.
The bottom line
It is possible to build wealth with compound interest investing. Even if you have limited funds, they will multiply over time and the money accrued will accumulate to give you a comfortable nest egg for the retirement years. Like with any other investment, you do need to be careful when investing or seek the advice of a trusted financial advisor. Remember to rebalance the portfolio from time to time and move the funds from a low-interest account to a high-yield account.
Not all types of investments will be ideal for you, so, remember to identify your personal finance goals and then proceed with the investment that aligns with your portfolio.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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