If you’re new to investing, compounding should be at the start of any investing discussion. Compounding refers to earning interest on top of the interest you’ve already accumulated from previous periods, and it’s a way to potentially magnify your savings over time just by staying invested in the market.

If you can understand compounding as a beginner, it allows you to get excited about the possibilities of investing and set expectations about how that money can grow over time.

So, what is compounding?

Simply put, compounding is the percentage of money you earn on top of your original investment (aka your principal investment) plus its earnings from previous periods. It can be calculated by banks or financial institutions on a daily, monthly, or annual basis. 

How does compound interest work?

Compounding interest is the interest on a loan or investment found by the initial principal plus the interest accrued from preceding periods. 

The principal is compounded because it’s periodically increased by a percentage (i.e., adding 10% each month). This differs from linear growth when the principal is increased by a fixed number (i.e., adding 10 each month). Let’s look at an example: 

Imagine that you deposited $100 in a savings account that accrues 10% interest annually. After one year, you’d have $110 in that savings account. After two years, though, your interest would have compounded, and you’d have $121.

That’s because you’re not just earning 10% interest on your initial deposit ($100)—you’re earning interest based on your new total earnings ($110). So after two years, you’ll earn your 10% interest based on your new total of $110. Here’s a breakdown of how those earnings could compound over time: 

Initial deposit: $100

Year 1: $100 + (100 x 10%) = $110

Year 2: $110 + (110 x 10%) = $121

Year 3: $121 + (121 x 10%) = $133

And after 10 years of compounding at a rate of 10%, your $100 deposit would grow to $259.37. That’s the power of compounding in action.

So, what does compounding have to do with you and your money? 

Compounding can either work for you or against you, depending on whether it’s for an asset or a liability. The example above shows how compounding works in your favor if it’s for a savings deposit or investment (assets). 

But it can also apply to liabilities, like money owed on a loan—when compounding interest is accrued based on your unpaid principal plus interest charged over time. In this case, the compounding interest means the amount you owe increases (compounds) over time. Compounding money when it comes to accounts with debt is something you want to avoid. 

The compound interest formula

The formula to calculate compound interest is A=P(1+r/n)nt.

• A = the total amount of money accrued on your principal plus interest, after n years 
• P = principal (the initial investment or deposit) 
• r = interest rate (in decimal form) 
• n = number of compounding periods (how often the interest is compounded per year) 
• t = time in years (how long the principal remains invested/deposited)  

Let’s put this formula into action with some concrete numbers. Say you deposit $500 into a savings account with a 5% interest rate that compounds monthly for 10 years. So: 

• P = $500 
• r = 0.05 
• n = 12
• t = 10

Now let’s plug those numbers into the compound interest formula: 

A = P (1 + [r / n]) ^ nt

• A = $500 (1 + [0.05 / 12]) ^ (12 * 10)
• A = $500 (1.00417) ^ (120)
• A = $500 (1.64767)
• A = $823.84

In 10 years, your new total is $823.84—your principal plus $323.84 in interest. 

Compound interest vs. simple interest

Simple interest is interest that’s paid only on the initial principal of a loan, and not on any interest from previous periods. That means the interest isn’t compounded. 

Going back to our $500 savings deposit example, a deposit of $500 with a 5% interest rate would mean earning $25 a year, every year. Instead of the earned interest being added back into the principal (compound interest), simple interest is calculated based on the original principal alone.  

Here’s how to calculate simple interest: 

A = P (1 + rt) 

• A = the total amount of money accrued after n years, including interest
• P = principal (the initial investment or deposit) 
• r = interest rate (in decimal form) 
• t = time in years (how long the principal remains invested/deposited)  

We can see that this formula is just a simplified version of the compound interest formula. Here’s what it looks like using our $500 example: 

A = P (1 + rt) 

• A = $500 (1 + [0.05 * 10]) 
• A = $500 (1 + 0.5) 
• A = $500 (1.5)
• A = $750

Ten years of earning 5% simple interest on your $500 deposit yields an extra $250 earned. 

Compound returns

The answer to “what is compounding” is incomplete until we also understand the element of compound returns.  The magic of compounding is revealed when it comes to compound returns on your investments in the market. 

When you keep reinvesting the dividends you earn, your returns have the chance to compound significantly over time. And if you’re a young investor who still has a ways to go until retirement, your opportunity to accumulate long-term wealth grows exponentially. 

Timing is everything when it comes to compounding. The sooner you start investing, the more time that money has to grow. Even a small amount a day can add up to sizable returns thanks to the power of compounding. Here’s a brain teaser to prove it: 

If you were offered the choice of $100,000 today, or a penny today with the amount you receive doubled every day for a month (a penny on the first day, 2 cents on the second day, 4 cents on the third day, etc.), which would you choose?

Surprisingly, it’s smarter to start with the penny, because by day 31, you’d have more than $10 million. That’s the magic of compounding. 

Examples of compounding

As we mentioned earlier, compound interest can work for you or against you, depending on whether you’re investing money or owing money. Here are some  examples of compounding in different types of accounts: 

• Savings and checking accounts: Making deposits into an interest-bearing account like a savings account means that interest will be added to your balance, allowing your money to grow over time. 
• Tax-advantaged retirement accounts (401(k)s and Roth IRAs): Investments in accounts like a 401(k) or a Roth IRA also compound over time, and you can grow your balance faster if dividends are reinvested regularly. 
• Student loans, mortgages, and other personal loans: Compound interest works against you when you’re borrowing money. Compounding on loans means any unpaid interest for a given period is added to your loan balance, from which future interest charges are accrued. 

Best practices for approaching compound interest

Any new investor should apply the power of compounding if their goal is to accumulate long-term wealth. Use these tips to reap the full benefits of compound interest and allow your money to work for you: 

• Start early: The sooner you start investing, the longer your money has to grow. Every day you wait is a missed opportunity to benefit from the power of compounding. 
• Pay off debt: Since compounding works against you when you’re borrowing money, prioritize paying down any debts to avoid paying more over time. 
• Focus on the long term: Time is on your side when it comes to compound interest. Instead of going after short-term gains or cashing out when the market is high, learn to ride the waves of the market and give your money time to grow. 

• Look at APY, not APR: Focus on annual percentage yield (APY) rather than APR when comparing accounts. The APY provides a more accurate view of expected interest earnings, whereas APR accounts only for the simple interest rate. 
• Choose accounts that compound interest daily: Compounding frequency is the interval at which your interest is paid out. The more often interest is paid, the greater returns you’ll see from compound interest—look for accounts that compound daily rather than quarterly or annually. 

The concept of compounding reveals why investing can be a smarter path to building wealth than simply saving. Not to mention, one of the keys to maximizing your financial potential is to save or invest money early and often.

If you’re looking for extra support, consider turning to a platform like Stash—users can automate the investing process with the help of Auto-Invest, which can save or invest money for you automatically.

Investing made easy.

Start today with any dollar amount.

Get Started

Compounding FAQs

Have more questions along the lines of “what is compounding?” We have answers.

What is the rule of 72?

The Rule of 72 is a calculation that estimates how long it would take for an investment to double in value as a result of compound interest. Here’s the formula:

Years to double = 72 / rate of return on investment (the interest rate) 

In other words, you can find the number of years it would take to double an investment by dividing 72 by the interest rate. 

How can investors receive compounding returns? 

Investors can receive compound returns through dividend payments. If you’re investing in stocks and the value of a stock grows over time, you can earn compound interest by reinvesting your profits. 

If payouts are made in cash, they will need to be manually reinvested in order to potentially earn additional compounding returns. Mutual funds, on the other hand, often offer automatic dividend reinvestments in order to earn compound returns.  

What type of average is best suited for compounding?

For investments that have compounding, the time-weighted rate of return (TWR)—also known as the geometric average—is best suited for calculating average returns. It’s able to provide a more accurate estimate of returns by isolating returns that were affected by cash flow changes, balancing out the distortion of these growth rates. 

The post What Is Compounding? An Explanation of Compound Interest appeared first on Stash Learn.

I wanted to write to you today to give you some insight about what’s going on in the markets.

The three major equity indexes—the Dow, the S&P 500, and the Nasdaq have all fallen. The Dow itself is down more than 500 points as of noon Wednesday, October 2, 2019.

Here’s what may be happening: Some investors are worried about a slowdown in the overall economy. There is some concern about an industry index produced by something called the Institute for Supply Management (ISM). This index basically shows how much companies are ordering from manufacturers in the U.S. And the ISM said U.S. manufacturing activity fell in September to its lowest level in more than 10 years.

That has sparked fears that global growth might be slowing. There are other things going on as well, such as the trade war with China, Trump impeachment talk, slowing auto sales, and falling bond yields that are causing uncertainty too.

While this may be true, it may also not be. Tomorrow we may see another data point suggesting growth. While single data points may move the markets up or down, as Stashers we should always focus on the long term

Okay, so now that you know what’s going on, which is important, zoom out and take a long-term view! Today’s news is short-term noise, and markets can go up just as easily as they can go down. What I recommend is setting your sights on long-term investing, and making regular investments regardless of whether markets are moving up or down. We built Stash so you can add small amounts of money on a regular basis, and for long-term investing. 

Invest for the long term!

I’m a long-term investor, and here’s what I know:

When the market moves sharply down, it’s understandable for someone to be nervous. It can be tough to see your portfolio go up and down. That’s especially the case if you’re investing for the first time during one of these periods. Hey, I was a beginner investor once, too.

During my first bear market in the early 2000s, right after the dot-com bust, it wasn’t fun seeing my account balance decline; however, I always had a long-term perspective. In 2008, I lived through another big market correction. But again, I thought long term and maintained my focus.

The most important thing I want to say is that volatility is a completely normal part of investing. Don’t get caught up in short-term market noise. Over time, staying in the market and long-term investing is the way to go. 

No matter what the market does, continue to buy small amounts of your investments on a regular basis.

For some insight into the importance of long-term investing, take a look at this chart, which shows the compounding value of stocks since right before the Great Depression. 

Turn on Recurring Transactions

It’s an easy way to add small amounts of money on a regular basis into your investments. This way, you can avoid the emotional aspect of investing and won’t get fooled into trying to time the market, which means trying to make guesses about which way the market is heading. (No one can predict exactly what the market will do tomorrow or next week. If anyone tells you they can, run away.)

The key to long-term investing is to build wealth over time.

That means some weeks you’ll consider buying shares when they’re high, other weeks when they’re low, and over time, the highs and the lows can balance themselves out. 

Here’s why Recurring Transactions can be a great tool. By putting small amounts of money into your investments on a regular basis, you can feel good about ignoring market volatility and focus on investing for the long term. Even $5 a week can make a difference.

Recurring Transactions is an incredibly powerful tool, and an essential part of the Stash Way.

Remember the Stash Way

Investing can be confusing, and maybe even scary, when markets become volatile.

That’s why we’ve boiled down our investing philosophy into three basic principles that we hope can guide you as you make your first investing decisions. We call our approach the Stash Way. Here are its three pillars:

• Invest for the long-term. (Don’t time the market.)
• Invest regularly. (Turn on Recurring Transactions.)
• Diversify. (Don’t just buy stocks.)

When in doubt, follow the Stash Way, which you can learn more about here.

Work hard, and then make your money work hard for you. By taking a long-term view and consistently investing small amounts of money, you can build wealth over time, and put yourself on a path toward a more secure financial future.

The post Here’s What’s Happening With Markets appeared first on Stash Learn.

Many people are nervous about putting their money in the market and hesitate because they believe that investing has more to do with luck than anything else.

In other words, they believe their ability to earn a return on their investment comes down to pure chance—like the flip of a card or roll of the dice. Investors and gamblers do have one thing in common: They both want to put more money in their pockets.

Investing vs. gambling

Investing and gambling could not be more different.

Here’s why investing your money is typically a better option for those looking to increase their wealth, rather than buying a lottery ticket, or going all-in with a pair of jacks:

The odds are in your favor

Anyone familiar with gambling has likely heard the phrase “the house always wins.” Since casinos are in the business of making money for themselves, that means the scales are tipped in favor of the dealers.

Investing is generally a much more effective way of making your money work for you. And most importantly, investors have a lot more control in where your money goes and how it can grow.

Gamblers hope for a quick win. Investors want to build wealth over time

For example, if you bet $1,000 that the roulette wheel hits your lucky number, you’ve got one shot at cashing in. Your odds? 35 to one. That’s a risky bet. And there’s a good chance you’ll walk away from the casino with less money than when you walked in.

Understanding risk

Investing involves risk. But by building a diversified portfolio with stocks, bonds, and holdings from multiple sectors (tech, energy, etc.), you can balance out your risk. In other words, you’re not betting it all on one investment—or putting all of your eggs in one basket.

If one investment goes down in value, you’ll have other investments that may hold steady, and keep your portfolio afloat.

For example, numerous advisers say an effective way to manage your money is by applying aspects of Modern Portfolio Theory (MPT). Nobel Prize-winning economist Dr. Harry Markowitz conceived the idea for MPT which formed the foundation for portfolio management by balancing risk and return.

The general idea of MPT is that by investing in a diverse assortment of stocks, bonds, and other securities in a multitude of countries, you can minimize risk.

Invest with a plan

You’ve probably seen news reports about people who win a lot of money at the casino or by playing the lottery. These make it seem like a lottery win is not only possible but probable. Unfortunately, it’s not. Losing is nearly inevitable when you gamble. 

Gamblers hope for a quick win. Investors want to build wealth over time. Fast money sounds great but it isn’t an actual plan to get you to your goals.

Rather than just “win big,” many investors have a specific plan as to what they’re investing for in the long term. This goal, whether it’s saving for a down payment or a child’s college education, should align with your investment strategy.

Once you have a plan in place, you can adjust your portfolio according to your timeline. 

The power of compounding

By choosing to invest your money with a solid strategy you can allow your assets opportunity to compound over time.

Here’s how compounding works:

Say you start putting away $50 a week in an investment account that owns a variety of stocks, bonds, and cash. If that account earns an average of 5% annually, you’ll have over $159,669 in 30 years when the interest is compounded annually.

The post Investing vs Gambling: Why They’re Totally Different appeared first on Stash Learn.

Bloom, who died in 2016 and whose estate was settled last week, worked for 65 years at the same Wall Street law firm and purchased small shares of stock that mirrored larger purchases made by her bosses.

Over time, that money turned into a $9 million fortune. (She reportedly left the remaining money to her alma mater Hunter College, and to her family.)

How can a secretary amass $9 million?

Regular lives, big fortunes

Bloom’s story is astonishing, but secret millionaires who become philanthropists upon their deaths are more common than you think. What they all have in common is a commitment to regular saving, modest lifestyles, and investing in the market.

Other examples include Grace Groner, who reportedly bought 3 shares of Abbott Laboratories stock in 1935, for a total of $160. She held onto those shares as she worked at the company, reinvested the dividends, and upon her death in 2010 had amassed a staggering $7 million, according to reports. While it may be a difficult to duplicate gains like that today, Groner nevertheless left the money to her alma mater, Lake Forest College, in Lake Forest, Illinois.

Similarly, Eugenia Dodson, a farmer’s daughter who grew up in rural Minnesota and worked in a beauty shop in Miami, Florida before marrying, amassed a fortune of $35.6 million by the time she died at 100, in 2005. She did that by investing proceeds from a land sale in blue chip stocks, according to reports. Dodson left her fortune to the University of Miami, for cancer and diabetes research.

Frugality and lessons of the Great Depression

All three experienced hardship and the Great Depression and were frugal their entire lives. Groner, for example, lived in a tiny one-bedroom house that had been willed to her, and that could hardly contain her small amount of furniture. Bloom worked until she was in her 90s, and took mass transit to work.

Of course, all three women had something else in common: they lived to ripe old ages, had long and stable work careers, and benefited from some of the biggest boom years the stock market has ever known.

A stock index called the S&P 500 had an average annual return of more than 9% for much of the time Bloom and the other women invested. That time period includes the post-World War II boom years of the 1950s and the dotcom years of the 1990s when the stock market had spectacular gains. But it also encompasses the financial crisis that began in 2008 when equities lost more than half of their value.

Going forward, the average annual return on stocks is likely to be closer to 6%. Nevertheless, you may still put away a sizable sum and fund your own charity at the end of your life.

The power of compounding

It’s not magic, really. In fact, there are about 5 million people in the U.S. with a net worth of $1 million or more. Most investors can grow wealth through a process called compounding. It’s basically when your money, and the interest it earns, earns interest on top of the interest.

Here’s an example of what compounding looks like, if you put aside $50 a week, or $200 a month for the next 30 years, earning 5% annually. You’d have $159,669. With interest and compounding, that’s more than double the $72,050 of principal you put away.

Be your own philanthropist

If you want to get to Bloom or Groner’s level of wealth, you’d have to put away more than $50 a week–and definitely invest it. But you might still amass a significant amount of money by saving and investing what you can and letting compounding do the rest.

Then you can leave your cash to a cause you find worthwhile, whether that’s education, animal welfare, or medical research.

The sky’s the limit. Start putting your money to work now.

The post Secret Millionaires Are Everywhere—Could You Become One? appeared first on Stash Learn.

This is just one of the worst pieces of advice anyone can give you and there is a misconception around this.

If someone had told me that when I was 23 and putting away as much as I could from each paycheck (and it was very small amounts at first), I’m not sure I would be sitting here writing to 2.7 million Stash subscribers.

The reason we started Stash was to help people learn and invest.

Before we launched we asked hundreds of people how much money they thought they needed to start and everyone had a similar answer: “I don’t know—but I’m pretty sure you have to be rich.”

“Don’t ever let anyone say you can’t be an investor because you don’t have the money to do it.”

This thinking has been ingrained in people because Wall Street caters mainly to the wealthy. And Wall Street’s incentives don’t always align with the average American who is just trying to pay their bills every month.

Don’t ever let anyone say you can’t be an investor because you don’t have the money to do it. We dropped the minimum to $5 so that anyone could start investing. $5 may not seem like much. But it’s a place to start and learn.

Saving a little bit of money on a regular basis adds up. And it makes a lot more sense (and is a lot less risky) than waiting for the day when you have a lump sum to put in the market.

Why is investing small amounts over time a better idea than putting in a big chunk on a single day?

Because you won’t need to time the market, which is a fool’s errand.  Putting in whatever you can afford every week is the best strategy because you’ll buy some when the market is up and some more when the market is down – giving you the average – which has worked well for investors over the last 30 years.  

There’s always that person out there who wants to give you advice because they think they know better or have more money than you. As a self-made, native New Yorker and the CEO of Stash, I want to reassure you — you are doing exactly the right things: learning, investing and building wealth for yourself.

~86% of Stashers are first-time investors.* Every investor was once a beginner investor. We all have to start somewhere. The world has changed and investing isn’t just for the rich anymore.

It doesn’t matter how much money you have or how much your dividends are right now. Over time, small amounts of money grow to bigger amounts. That’s the nature (and power) of compounding. Pennies become dollars. Two digits become three and then four. It’s not magic — it’s patience and a sound strategy.

It doesn’t matter how much you get paid or what your net worth is. You are taking the right steps to build your Stash. Think long-term and keep it growing. And remember, it’s never too late to start. 

Keep it up. You are our heroes.

Stash on,

Brandon Krieg

The post Stash CEO: People Who Say You Need a Lot of Money to Invest Are Wrong appeared first on Stash Learn.