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.

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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.

Many people struggle to cut their credit card spending for exactly this reason. It’s hard to forgo the most convenient and friction-free payment option in your wallet. The problem is, of course, that when those bills do finally come, you might discover you’ve been spending beyond your means.

Americans hold almost $1 trillion of credit card debt, and the average household owes around $8,000. Whether you’re trying to pull yourself out of debt or merely trying to avoid it, limiting your credit card spending may be an important part of your budgeting strategies.

Luckily, there are some common sense tips and tricks that can help you reign in your use of plastic. I spoke with with Kelly Luethje, a Certified Financial Planner and founder of Willow Planning Group, to find out what advice she gives clients who are struggling to limit their credit card spending.

Reduce the number of cards you use

The first step to taking back control of your spending is to take stock of what’s actually in your wallet. Luethje suggests making a list of all the credit cards you have open along with each one’s interest rate, credit limit, and annual fee; the balance you’re carrying on it; and any perks like points or miles.

The first step to taking back control of your spending is to take stock of what’s actually in your wallet.

This can help you decide which cards to keep using and which to stash away in the back of a drawer—or cancel entirely. Cards you rarely use should be prime candidates for elimination, especially if they carry annual fees.

Many people are afraid to cancel credit cards because it will ding their credit score. However, depending on the length of your credit history, a cancellation may not have much of an impact, Luethje says. And while you don’t want your credit score to tank, it’s not worth obsessing over small fluctuations unless you’re planning to make a major purchase, like a house or a car, soon.

“If your goal is to curb your credit card use and spending, then focus on that first,” Luethje says. “Repairing credit is the next step.”

Apply a spending limit

If a card you’ve been swiping too much has perks you love—whether they’re airline miles or cash back—consider limiting your spending to a specific amount that you know you can pay off each month.

“If you’re approaching the limit or even halfway there, you can begin making active decisions on how you spend your money,” Luethje says.

For example, if you’ve already spent $350 out of your $500 limit on the 15th, you might think twice about splurging on a $150 dress and using up your entire credit allotment for the month. It may help to actually put a sticker on the card reminding you of the limit so you don’t “forget” and overspend.

This approach only works if you check your balance daily or at least weekly, so make sure logging into your account is frictionless and easy. Consider downloading the bank’s mobile app if you haven’t already—that way you can check on the go.

Use a card for certain types of expenses

If obsessively tracking a balance doesn’t sound like your style, you can try limiting your credit card use to only certain fixed expenses. Try setting up automatic payments for monthly, recurring bills, including utilities or subscriptions like Netflix. That way “every month you know pretty much what the charge is going to be, and that you’re going to pay it anyway,” Luethje says.

Then, when you go shopping outside the house, bring only a debit card or cash.

Disconnect cards from online shopping sites

It’s hard to imagine life without online shopping, especially if you belong to one of the many households who rely on sites like Amazon for the delivery of necessities like paper towels and laundry soap. For many people, however, the ease of one-click ordering is an invitation to massively overspend.

If that sounds like you, you may want to delete your credit card information from e-commerce sites and/or your internet browser so that when you do want to make a purchase, you have to type the numbers in manually. Sometimes adding that extra step can discourage excess purchases, Luethje says.

Removing online shopping sites from your bookmarks and your browser history might help remove temptation as well.

Go cash-only for a few months

The thought may seem terrifying. But if you switch from a credit to a debit card, you may still swipe too much and get hit with expensive overdraft fees. Going completely cardless may be

just the strategy you need. Paying in cash tends to drive home what things really cost, so it can help even the most committed shopaholics reign in spending. It also forces you to acknowledge exactly what you’re spending money on, and how much.

After you’ve stuck to a budget for a month or two, you can start reintroducing credit cards to your life, keeping in mind the tactics described above. But old habits die hard, so proceed with caution.

Cutting back on your credit card spending can be a challenge but you can do it! Don’t let plastic be your master.

The post 5 Ways to Cut Down on Credit Card Spending appeared first on Stash Learn.

In fact, total consumer debt has reached a new record. As of the end of October, consumers owed $12.96 trillion, which is about $280 billion more than they owed the last time their debt reached a peak, prior to the financial crisis in third quarter of 2008, according to the Federal Reserve Bank of New York. The N.Y. Fed, one of 12 banks in the central bank system, issued a quarterly report on consumer debt on Tuesday.

One culprit? Subprime auto loans.

More people with poor credit, known as subprime borrowers, are taking out loans to buy cars, and as they do that, the level of loan delinquencies is also going up.

What’s a subprime auto loan?

The N.Y. Fed defines a subprime loan as one where the borrower has a credit score under 620.

Auto loan balances now stand at a record $1.2 trillion

A credit score is a composite based on how you use credit, including how much debt you have, your history making loan payments, and the length of time you’ve used credit, among other criteria. The lowest score is 300, and the highest is 850.

Interest rates on subprime loans are much higher than those for borrowers with higher credit scores. They can have 20% annual interest rate or more, according to reports. (The average car loan rate is reportedly about 4.2%.)

Over time, the higher rate can really add up. In fact, that could add about $12,000 in interest alone to the cost of a $20,000 car over five years, according to some auto loan calculators. That assumes a down payment of $0, no closing costs, sales tax or other transaction fees, and an annual loan interest rate of 20%.

What’s a delinquent loan?

A delinquent loan is one that’s past due, usually over 30 days. In this case, the NY Fed looked at loans past due by 90 days or more. It found 6.3 million Americans are 90 days or more behind in their auto loans, which is an increase of about 400,000 compared to the same quarter a year ago. Many of the past due loans are taken out by subprime borrowers who can’t afford to pay their loans, according to reports.

Auto loan balances, which increased by $23 billion in the quarter and now stand at a record $1.2 trillion, are a potentially worrying sign for the economy, experts say, as consumers get overextended with debt and may lack the means to repay.

That’s despite an unemployment rate of 4.1% as of October, 2017, which is near a 20-year low.

What should you do instead of taking out a high interest loan?

Shop around. Look for the lowest rate you can find. Try your local bank, as they may offer you a better deal. The N.Y. Fed points out that about 75% of all subprime loans are originated by auto finance companies, which are generally affiliated with car manufacturers and dealers.

The number of subprime auto loans, which represent about $300 billion of the total, has steadily increased over the last few years. The volume originated by auto finance companies has doubled since 2011 to $200 billion, according to the  N.Y. Fed report.

The post What Do Subprime Auto Loans Have to Do With the Economy? appeared first on Stash Learn.

The average U.S. consumers carries about three credit cards. But how many credit cards do you really need?

When you consider the risks and rewards of carrying plastic, it’s all about understanding your individual spending habits and needs.   

Here’s an explainer:

The benefits of a credit card

If you’re financially responsible–meaning you pay off your balance each month and on time–a credit card can offer many benefits. These can include letting you conserve your cash, giving you a float until your monthly payment due date as well as cash back, airline miles, and other rewards.

Many of the major credit cards also come with a lot of perks like purchase and price protections, lost luggage insurance, and more.

Another plus: Credit cards can provide an ongoing spending tracker that’s always available online.

“A credit card is one of the greatest financial tools if it’s used correctly,” says Bill Hardekopf, the chief executive of Lowcards.com, a consumer resource for credit cards.

How many credit cards do you need?

Generally speaking, the number of credit cards you should have depends on your credit history and how responsible you are about managing your credit cards. What’s right for one person isn’t necessarily right for another, so there really is no magic number.

Having more than one credit card account can help you maintain a healthy credit profile, as long as you’re responsible with your spending and payments.

However, most financial experts agree that you do need more than one credit card, and many will tell you the ideal number is two or three.

Your “daily driver.” Your primary card is the one used exclusively for daily purchases such as groceries, gas, and household items, as well as other major expenses like vacations, automobile and home repairs, and recreational activities. Shop around for the cards that don’t have an annual fee, offer an ongoing average APR of no more than 13%, and that offer the best rewards and perks such as cash back and travel rewards.

A backup card in case of emergencies. If your primary card is maxed out, stolen, declined by the card issuer due to potential fraud, or lost, you can still use your backup card to make purchases. Having a reserve card also comes in handy if your primary card is not accepted at a particular merchant. (That’s usually not an issue for Visa and MasterCard, but it can be the case for Discover and American Express cards).

What about retail/store credit cards? Retail store cards should only be opened if you’re absolutely certain you can pay off the balance in full, every month, experts say. On average, these cards have the highest interest rates, and they can get you into serious debt very quickly. They may tempt you to take advantage of retail coupons and and other perks that come with using your credit card, which can cause people to purchase items they don’t need. Often, the short-term savings aren’t really worth the headache of managing additional cards.

Credit cards and your credit score

Having more than one credit card account can help you maintain a healthy credit profile, as long as you’re responsible with your spending and payments. However, applying for a number of new accounts in a short period of time will probably hurt your FICO score more than applying for a single new account. That’s because multiple applications in a short period of time can suggest you’re a riskier borrower, or that you’re experiencing financial trouble.

Additionally, consumers with a longer credit history will see the age of their oldest account reflect positively on their FICO score. Banks want to know what kind of borrower you are, the risk that lending to you poses, and that you have a long and well established credit history. For these reasons, experts recommend keeping a few older credit card accounts open, even if you don’t use them. Some people will keep one or two older accounts open and just put the cards in a file and forget about them.

The exception to the rule

If you’re a new credit card user, you should only open one account to establish credit and learn discipline, Hardekopf says. This account will help you learn how to use a credit card properly, including knowing the due date, understanding the minimum monthly payments, and hopefully how to pay off the card each month in full.

The bottom line is this: Understand yourself and learn how you use credit. “If you’re new to credit, tread lightly until you know your spending habits,” says Adam Jusko, founder of CreditCardCatalog.com, a credit card comparison and news site.

The post How Many Credit Cards Do You Really Need? appeared first on Stash Learn.

Consumers now hold more than $1.2 trillion in credit card debt. That’s a record high, exceeding by nearly $1 billion the last record seen right before the recession in 2008, according to the Federal Reserve Bank (the Fed), the central bank of the U.S. which sets monetary policy. The Fed also publishes monthly reports about consumer household debt.

Read more: What’s Household Debt?

What’s causing increasing credit card debt?

More banks than ever before have offered consumers credit cards in recent years. Approximately 171 million consumers now have plastic, about ten million more than in 2005.

And it turns out more consumers are spending on credit. That’s not necessarily a bad thing, according to some financial experts. On the plus side, it means as the nation returns to full employment consumers feel confident enough about their jobs and the economy to go out and spend. And consumer spending fuels the economy.

Read more: What to Make of All the Layoffs in the Retail Industry

The downside? Average household credit card debt has also crept up, exceeding $8,000, according to a recent WalletHub survey. That amount is also approaching levels last seen prior to the recession.

Delinquencies on the rise

Delinquencies on credit card accounts have also climbed in the past year, according to the Federal Reserve. Delinquency is when your account is past due, meaning you haven’t made at least the minimum payment on your debt for more than a month.

Serious delinquency means your account is 90 days past due or more. An increase in delinquencies means that consumers are struggling to find cash to pay off balances, or even meet their minimum payment requirements.

Credit card debt: A cause for worry?

Credit card debt is one of three consumer borrowing areas that concern experts as debt levels have continued to rise in the last few years. The others are student loans and auto loans.

Student loan debt has also climbed into record territory, of $1.3 trillion. Auto loans have also steadily increased to $1.2 trillion, according to USA Today. Total household debt, which includes things like mortgages, is now $12.7 trillion, exceeding levels seen last during the recession.

Take control of credit card debt:

Here are some things to think about as you consider credit cards and your credit card debt.

Unlike student loans and auto loans, credit card loans are revolving debt. That means a bank extends you a credit line that’s available for you to use at any time, provided you pay at least the minimum amount each month.

• Look for credit cards with the lowest interest rate you can find. The average rate is currently about 16.65%, which on an $8,000 balance equals $1,300 in interest annually. Some cards have 0% introductory offers. But you need to pay attention to when those offers expire.
• If you have more than one credit card, pay off the balances with the highest interest rates first.
• Don’t miss payments, as that will damage your credit score. Your credit score is essentially a running record of financial trustworthiness, used by banks and other financial services providers to determine rates on everything from auto loans to mortgages.
• Consider using a debit card rather than a credit card, as the money will come directly from your bank account.

Key takeaways: Consumer credit card debt has reached record levels. That’s not necessarily a bad sign, and could reflect confidence in the economy as consumers continue to spend. But late payments are also creeping up, and other forms of debt like student and auto loans are also mounting. If you use credit cards, find plastic with a cheap rate. If you have credit card debt, pay off balances on the highest interest rate cards first. And don’t miss your payments, it’ll damage your credit score.

In short, it’s never a good idea to carry too much credit card debt, as you can quickly find yourself underwater trying to manage the monthly payments and the interest charges.

Read more: 4 (Almost) Effortless Ways to Save Money, Starting Today

The post Credit Card Debt Hits Record High. How to Avoid the ‘Charge It’ Trap appeared first on Stash Learn.

But for many of us, the conveniences of credit cards are often overshadowed by mounting debt, the kind that builds up, almost without warning. Interest rates can skyrocket and late fees can add up taking your budget into the danger zone.

Here are five types of spending that you should approach with extreme caution.

Cash withdrawals

A credit card can be used to withdraw cash at almost any ATM. While this can be a lifeline in an emergency, it’s not a great idea to make this a habit.

Most card issuers charge far higher interest rates for cash withdrawals than for purchases.

Most card issuers charge far higher interest rates for cash withdrawals than for purchases, as well as often levying a fee for every transaction. In short, this can an extremely expensive way of obtaining cash. Use your regular bank card whenever possible if you need access to ready cash.

Credit card checks

The same goes for those blank checks you may receive through the mail from your card issuer. They can be used like any regular check, letting you make payments to companies or people, but they suffer from the same cost issues as cash withdrawals – and they can even be more expensive.

Despite their convenience, these checks should only be used in an emergency when no other payment option is available.

Paying everyday bills

Although a credit card may be an easy way to pay a bill, unless you clear your balance at your next statement, you’ll be charged interest on the transaction. If you pay most of your everyday bills with your card, and don’t settle your account each month, your cost of living will rise significantly.

Worse, if you find yourself relying on credit to pay for day-to-day expenses, it’s a sure sign that you have deeper budget problems which need addressing.

Repaying other debts

It’s almost always a bad idea to use one type of debt to service another. Credit cards are among the most expensive types of borrowing available, and it makes no financial sense to use this costly finance to make payments on cheaper debt.

Again, if you find you need to use a credit card to avoid missing payments on other borrowing, it’s a certain indicator that your finances are in trouble.

Impulse purchases

Lastly, credit cards can make it all too easy to buy an expensive item that catches your eye, only to regret the extravagance when your statement arrives. If you carry the cost over to your next statement, those sunglasses or sneakers can become a lot more expensive because of interest charges.

Over time all this “fun” spending can quickly add up to a significant debt burden.

Used wisely, credit cards can be an invaluable addition to your daily financial life. However, you could easily find serious problems building up before you realize quite how deep a hole you’ve dug for yourself.

The post (Don’t) Charge it! Stop Using Your Credit Card For These 5 Things appeared first on Stash Learn.