Posted Friday, July 20, 2018 @ 6:48 PM Whether your student is majoring in math, business, history or Shakespeare, there’s one fundamental finance lesson they should learn well before walking across the graduation platform and that’s the power of compound interest. If simply reading the words compound interest just made your eyes glaze over, hear us out for just a moment. This concept could have profoundly positive or negative consequences to a student’s financial well-being in the long run. After all, Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it.” To be sure your student is among those earning interest rather than one who’s paying more than necessary, here are four things everyone needs to know about compound interest. It’s simpler than you think When stashing cash into a savings account, money market account, Certificate of Deposit (CD) or Individual Retirement Account (IRA), the financial institution pays interest at regular intervals (annually, semi-annually or quarterly) on the amount deposited during that interval. As time goes by, the interest earned on these deposits begins to grow substantially because the accumulated interest starts earning interest year-over-year. This seemingly magical growth isn’t supernatural, it’s simply compound interest. It truly rewards those who practice extreme patience Compound interest will not provide instant gratification. Instead, patience is its own reward. For instance, if your student deposits $10,000 into an account that earns 2 percent interest annually, this deposit will grow and grow. However, it will move at a snail’s pace at first, then triple in size by the time they’re enjoying retirement: $10,200 after one year. $10,404 after two years. $12,189 after 10 years. $16,406.06 after 25 years. $22,080.40 after 40 years. $29,717.31 after 55 years. They can level-up their earnings with regular contributions If your student adds an additional $600 to that account each year (that’s just $50 a month or the cost of a cup of coffee a day), they will have $54,824 saved after 25 years. But after 55 years they’ll have $148.021.15 when all they contributed was $43,000 — that’s more than $100,000 in earned interest. Just keep in mind that interest rates can vary greatly, depending on what their financial institution offers, how much they deposit initially and the type of account they have — with regular savings accounts typically paying the least and CDs or Money Market accounts usually paying more. Want to crunch the numbers together with your student? Use a compound interest calculator to discover the earning potential of what they can realistically contribute. While Compound Interest can be your friend, it can also be your frenemy. Just like they can earn compound interest when they’re saving, they can also pay compound interest when they’re borrowing. So students will want to keep the following in mind whenever they’re considering taking out a loan: the more they borrow, the higher the interest rate and the longer they take to pay it off, the more expensive it will become. This is true for student loans, car loans and someday their mortgage. But maxing out or carrying balances on credit cards is how students can really bury themselves in debt because the interest rate is usually much higher compared to most other loans. Imagine that they owe $5,000 on a credit card with an 18 percent interest rate. Did you know that this debt will rack up $75 of interest charges every month? If they pay just the minimum of $85 each month, only $10 will go toward the principle (what’s owed) and rest pays interest. At this pace, it will take 15.6 years to pay back $5,000 — costing an additional $4,897.53 in interest. If your student wants to know more about compound interest and how to create a long-term savings plan that can help them achieve financial freedom, they can stop by your nearest branch and speak with a crewmember. FAIRWINDS even has a branch conveniently located on campus at UCF. They’ll be happy to answer your questions, walk you through the calculations and (when they’re ready) explore their options. Back