Fertilize Funds with Compounding

When you save money, you want to see it grow. For most people, contributing to an interest-bearing or dividend-bearing account is the easiest answer. However, to truly optimize your nest egg’s growth, you need to understand how and when interest and dividends are paid. While there all kinds of interest-or dividend-generating accounts out there, the most financially rewarding accounts are often referred to as “high-yield savings” accounts. The key term to look for? Compounding. 

But what is compounding, and what does it mean for the money you put in each month?  Let’s dig in to see how much of a difference it could make for you.

What Is Compounding?

The idea behind interest and divdends is simple — it’s a way for someone to make extra money from an initial investment. If you deposit a certain sum of money in a savings account, the financial institution will pay you a certain percentage so that they can use that money. You’ll be earning interest or dividends. But regardless of whether you’re borrowing or saving money, you should always be aware of the type of interest or dividends the account will accrue.

• Simple dividend accounts apply dividends only to the original amount or principal. For a savings account, that would mean only the money that you deposit earns dividends. Dividends are added into the account but don’t contribute to the dividend-earning figure.
• Compound dividend accounts pay dividends to not only the principal but also previous dividends accrued. Your previous dividend earnings are rolled into the total figure, and the dividend percentage is applied to the sum. For a savings account, that means that your deposits and any dividends that you’ve already earned together all earn dividends.

With simple dividends, the principal remains the same each year. But with compound dividends, the principal grows each year. If you’re wondering how to identify which type of dividends paid to an account, financial products must state whether they use simple or compound dividends and specify how often dividends are paid.

How to Grow Money with Compounded Dividends

The real secret to letting your money grow through compound dividends is to do just that — let it grow long term without making withdrawals. The whole point is to keep reinvesting earned dividends so that your dividend-accruing base increases. In turn, that incrementally increases the amount of dividends paid.

1. Let’s use an easy example of investing $100 at 5 percent in a compound dividend account. At the end of a year, you’ll have $5 in dividends that is combined with your $100 to become $105. That $105 will now earn 5 percent—another $5.25 that increases the dividend-earning balance to $110.25. Another round at 5 percent earns $5.51, bringing the dividend-earning balance to $115.76. As you can see, the initial sum for earning each year is increasing. This is the key benefit of compounding dividends.
2. If you add a zero to the $100 to make it $1,000 and start moving decimals one place to the right, the numbers rapidly become significant as you now have $1,157.60 instead of the original $1,000.
3. Add another zero and another decimal place to the right, and your original $10,000 becomes $11,576.00.

Depending on the type of account, dividends may be compounded annually, monthly or even daily.

Maximize Your Money with Compound Dividends

The most common question most investors have centers on how long their savings will have to grow to actually double in size. Savings calculators can help you perform detailed analyses using the original amount of a deposit as well as any regular future planned deposits, the dividend rates involved and the dividend-compounding frequency.

However, for quick estimates, many experts refer to the Rule of 72 to calculate how long doubling your money will take. Simply divide 72 by the dividend rate, and the resulting quotient indicates the number of years needed. For example, $5,000 at 5 percent dividend rate will have doubled to $10,000 after 14 years.

You can also use the Rule of 72 to estimate what kind of an dividend-bearing account you need to get the return on investment you need. For example, if your goal is to double your money within a certain number of years, you can divide the investment amount by the target years to get an idea of the dividend rate percentage you need to make that happen.

Financial Products That Let You Earn Compound Dividends

Financial institutions use both types of dividends for their various financial products. Certain financial savings products are noted for their ability to help you grow your money through compound dividends. The good news is that they’re easily opened at La Capitol Federal Credit Union:

• Share Certificates:  Certificates of Deposit and Share Certificates let you invest a sum of money for a specific amount of time at a certain dividend rate. At the end of the term, you can cash the certificate in, roll it over for another term, or reinvest it at a more preferable rate or term.
• High Yield Savings Accounts: These accounts offer higher dividend rates than standard savings accounts but are not as term-specific as certificates. Accounts usually require that you maintain certain minimum balances to qualify for the preferred dividend rates.
• Money Market Accounts: These accounts require larger minimum balances, but they offer higher dividends.  La Cap’s Liquid Assets Checking account pays dividends on the full dollar amount every day plus free access to those funds with online banking, mobile app, bill pay, and more.

As with all financial investments, you’ll want to be aware of any possible fees or penalties as well as any additional perks associated with your accounts.

High Yield Savings Accounts at La Capitol Federal Credit Union

The beginning of a new year is the perfect time to reassess your financial goals and how you can best meet them. That is exactly what La Capitol Federal Credit Union does best. We love showing our members how to use our products to their financial advantage.

If you’re ready to amp up your ability to earn and save, take a look at all we have to offer. Explore our compound dividend high-yield savings products online, or reach out to speak with our financial advisors to see what options will work best for you.