Compounding daily Interest can be your best friend or your worst enemy, depending on which side of the lending you are on. If you are saving up for a big goal, such as a vacation or to pay for college expenses, compounding can help you reach your goals faster. When you borrow money, such as when you use your credit cards, compounding can cost you money. Let’s explore compound interest and how to use a compound daily interest calculator to see how it adds up over time.
The Principle of Compound Interest
In the world of personal finance, interest is an amount paid over a previously established amount, and it is invariably expressed as a percentage that we call interest rate. When you shop around for credit cards, you pay attention to the annual percentage rate (APR) because you do not want to pay too much above your credit purchases or cash advances. When selecting a savings account that can help you achieve compound interest financial goals, you will be looking for banks that offer higher annual percentage yield (APY), which means that they pay more above your account balance.
Not all banks offer compound interest accounts; many instead offer simple interest accounts that do not reinvest the interest that has already accumulated, thus reducing the exponential factor when compared to compounding accounts. This contrast between simple and compound interest cannot be stressed enough. You always want to look for personal finance interests that pay compound interest even when the APY is lower than their simple interest counterparts.