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If you want to grow your wealth, compound interest investing is one of the best ways to get there.
If you’re wondering what investments have compound interest, below are some of the best compound interest investments available today.
We’ll teach you how to calculate compound interest, what investment accounts to consider, and how growth and capital gains can impact your long-term wealth over time.
What is Compound Interest?
Compound interest is the process of earning accrued interest on your investments, as well as reinvesting that interest back into the investment.
Returning the accrued interest into the investment allows your money to grow at an accelerated rate. Essentially, you’re making money not only on your original investment but also on any previous earnings.
Over time, compound interest can have a dramatic effect on your overall net worth.
You can focus on compounding interest in the short term, but you’ll likely earn more money in the long term. For example, most people’s retirement savings result from accumulated interest over many decades.
Calculating compound interest is straightforward. Here is a simplified example of a compound interest formula.
Imagine you invest $100 at a yearly interest rate of five percent. In the first year, you would earn $5 in interest, for a total of $105. In the second year, you no longer earn interest on just $100. Now, you earn interest on $105.
As such, you make more than the $5 in interest you earned the year before. Now, your investment would grow to $110.25 – an increase of five percent on top of the previous year’s earnings.
The process continues each year, so your investment will grow exponentially over time if you have a positive rate of return.
The above is a quick example, but if you extrapolate it, you can imagine how much interest you can earn over 30-40 years when you invest thousands of dollars per year.
Compound interest works, and the longer you let it work in your favor, the greater the future value.
The power of compound interest is one reason it’s essential to start saving for retirement as early as possible.
Even if you can’t afford to contribute sizable amounts of money each month, investing consistently over time will result in significantly more savings than if you wait until later in life to get started.
What Kinds of Accounts Have Compound Interest?
There are many different types of compound interest accounts. Most of them will require you to use brokerage services to open an investment account.
However, with some options, only bank accounts are necessary.
If you’re looking for a place to invest your money and earn compound interest, here are some of the best compound interest investments.
What are the Best Compound Interest Investments?
1. Individual Stocks
You buy a piece of a company that will hopefully increase in value over time when you buy stocks. In effect, this means that as the company grows, so does your investment.
With some stocks, you could receive dividends from the company, giving you an immediate return on your investment.
You can often choose to automatically reinvest those dividends, which helps your overall investment grow over time.
There is no guarantee that a stock will increase in value. Stock investments can be volatile, especially during economic uncertainty.
That way, you can get your feet wet without stressing about losing your initial principal.
2. Exchanged-Traded Funds (ETFs)
An ETF is a type of investment that tracks an index, such as the S&P 500. ETFs follow the index’s value as it goes up or down, reflecting in the underlying value of your ETF.
ETFs can be bought and sold in the stock market during regular market hours, and many brokerages offer commission-free ETFs.
Having the ability to buy these low-cost investment vehicles makes them a popular choice for beginning investors.
There are many different types of ETFs available, including those that focus on specific sectors of the economy (such as technology or health care) or geographic regions (such as Europe or Asia).
ETFs are a popular investment choice because they offer diversification and can be bought and sold promptly.
Robo-advisors offer the capability to invest in ETFs automatically as you make deposits into your brokerage account.
These investing apps handle all the investing on your behalf. You answer questions about your financial goals, risk tolerance, age, and preferences.
Consider starting an account with Betterment, the original robo-advisor that makes investing easy.
The service uses automated, low-cost index funds to invest your money in alignment with your financial goals and preferences.
3. Mutual Funds
Mutual funds are professionally managed investments that pool money from multiple investors to buy stocks, bonds, or other securities.
Mutual funds trade on stock exchanges just like individual stocks, and their prices fluctuate throughout the day.
However, unlike stocks representing ownership in a single company, mutual funds comprise multiple companies.
Additionally, they are actively managed by professionals who decide how to invest the fund’s assets.
Because they offer professional oversight, mutual funds are often considered an excellent compound interest investment for beginning investors. Mutual funds typically charge fees for this service.
They may also be subject to annual management fees depending on their structure.
4. Alternative Investments
An alternative investment is any type of investment other than stocks, bonds, mutual funds, etc. In other words, largely non-stock investments or equity investment unavailable to retail investors.
They can include hedge funds, venture capital investments, small business investments, and even collectibles.
Many investors choose alternative investments because they offer the potential for higher returns. They also come with increased risk compared to traditional investments like stocks and mutual funds.
Alternate investments can be attractive, but it’s hard to predict how much money you can make or how liquid the investments will be.
For that reason, more traditional investments like dividend stocks or mutual funds are a better option for those starting to invest.
One popular option to consider is Mainvest, a crowdfunding service that allows you to invest in Main Street small businesses across America.
The company vets small businesses, only allowing 5% of businesses who sign up for the platform to get chosen for raising capital from investors like you.
You can use the platform to build a small business investment portfolio that aligns with your investment objectives, tastes, and preferences.
Mainvest collects quarterly revenue and updates from the companies, offering you a share of these businesses’ revenues.
5. Real Estate (Direct Ownership)
Real estate is an investment that has been around for centuries. It can be a great way to build wealth over time.
There are two ways to invest in real estate: direct ownership or pooled investments (e.g., mutual funds, ETFs, REITs, etc.).
Buying and holding real estate directly can be a great option if you’re looking for long-term stability and like a hands-on approach.
When you invest in real estate directly, you become the property owner.
However, it’s important to note more work is involved when owning your property, from finding screening tenants to handling repairs and maintenance yourself.
Suppose you’d prefer to invest in real estate without the need for hands-on ownership. In that case, pooled investments such as mutual funds, ETFs, REITs or crowdfunding platforms can be great options.
These types of investments allow you to buy into more extensive portfolios that give your money exposure to many different properties with just one purchase.
6. Real Estate (Crowdfunding)
Crowdfunding is a lesser-known form of investing. Multiple investors pool their money together to invest in various projects, such as real estate.
Crowdfunding takes small amounts from many different investors instead of significant investments from a few individuals.
It’s an attractive option for those who don’t have money to buy into more traditional forms of real estate investment.
A structure like this can be especially beneficial for first-time homebuyers or families.
They may have smaller budgets and want to get involved with property ownership but might not otherwise have enough cash on hand to do so.
The downside is that you may lose control over exactly how you invest and which properties your pooled funds target.
Additional fees may also be associated with the investment process.
Before getting involved, you should understand the risks involved and how much return you might expect from these investments.
7. Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs, are a type of pooled investment that allows you to invest in real estate without needing to purchase a property yourself.
A model like this can be an excellent option for those who want the benefits of real estate ownership but don’t have the time or resources to manage their properties.
REITs work by pooling money from many different investors and then investing it into various forms of real estate. Investments can include anything from residential housing, to apartment complexes, office buildings and shopping malls.
Because REITs offer immediate access to a range of properties, they’re an attractive option for those looking for diversification in their portfolio.
One downside is that you lose control over which specific properties your money is invested in, as with any pooled investment.
Additionally, REITs can be riskier than some other forms of investment.
If you’d like to explore investing in REITs, consider Streitwise. For several years, this private REIT fund has beaten REIT industry peers in yields and investment returns.
The initial minimum is on the higher side at ~$5,000. Still, the high-yielding investment appears to deliver solid returns. It works well as a passive income idea for your overall investment portfolio.
8. Fine Art
Fine art can be an excellent investment if you have the cash to spare and look for something with a little more risk and excitement.
Unlike more traditional forms of investment, such as real estate or stocks, fine art is harder to value and predict returns.
These characteristics can make it a higher-risk option and has the potential for significantly greater rewards.
The upside of investing in fine art is that it represents an asset that tends to hold its value over time, even appreciate when chosen carefully.
The downside is that buying into the market can be risky because it’s difficult to value and predict returns.
Additionally, unlike other investments such as stocks or bonds, no regular income is generated from the artwork.
If you’d like to invest in blue-chip art, consider a service like Masterworks.
The investment platform allows you to invest in fractional shares of iconic artworks and build a diversified portfolio curated by the company’s industry-leading research team.
Once purchased, Masterworks securitizes the artwork for fractional investing and holds it for three to ten years to allow for appreciation.
You can choose to sell your shares on the secondary market within the platform or wait until the artwork sells, delivering you your pro-rata proceeds, net of fees.
If you’d like to try your hand at investing in blue-chip artworks, consider opening an account with Masterworks to learn more.
Cryptocurrencies, such as Bitcoin, are a relatively new form of investment that has seen significant growth in recent years.
Cryptocurrencies work by using blockchain technology rather than relying on central authorities such as banks.
The decentralized nature of cryptocurrencies makes them an attractive option if you look for privacy and security in your investments.
The downside of cryptocurrencies is that they are incredibly volatile. The value of Bitcoin, for example, has been known to jump or drop significantly in just a few hours.
It’s important to remember this before investing any money into cryptocurrencies and only to do so if you’re comfortable with the risks involved.
Ultimately, cryptocurrencies are a high-risk and potentially high-reward investment option that can add diversity to your portfolio.
They also offer a new type of asset class in what has proven to be a burgeoning market, especially among Millennials and Generation Z.
To participate in cryptocurrency investing, consider opening an account with eToro, the leading cryptocurrency trading app.
Suppose you don’t know how to invest in cryptocurrencies by yourself. In that case, you can elect to use eToro’s Copy Trader feature, which mimics the trades of leading traders on the platform.
Consider opening an account to learn more.
Short-term investments represent an option for those looking for stability and liquidity in their investment portfolio.
These types of investments typically have a shorter time horizon, meaning you will get your money back sooner rather than later.
One typical short-term investment is a certificate of deposit (CD). Banks and other financial institutions offer CDs, which allow you to invest your money for a predetermined period, usually between six months and five years.
At the end of the term, you will receive your original investment plus interest payments at an annual interest rate agreed on ahead of time.
Another popular short-term investment is Treasury bills, debt issued by the US government.
Treasury bills are considered very safe investments with a low risk of loss. You can also invest in local and state government municipal bonds and treasury securities like federal treasury bonds.
Ultimately, short-term investments tend to be more liquid assets that give investors fast access to their money should they need it.
However, because the investment time frame is shorter, there’s not as much growth potential over more extended periods.
One downside, as mentioned, is these types of investments typically have lower interest rates, meaning less opportunity for meaningful returns on your initial investment.
When considering short-term or long-term investments, you must keep all of this in mind and decide the best personal finance option for you.
10. High-Yield Savings Account
High-yield savings accounts are another option for short-term investments. These accounts offer higher interest rates than traditional savings accounts but have similar liquidity to cash deposits in most cases.
One downside of a high-interest savings account is that interest rates can change.
Know that even if you get the best interest rate deal possible initially, your rate may drop.
For example, during 2020, many different banks dropped their high-yield savings account interest rates numerous times. Events like this often happen during an economic downturn.
So, it’s essential to keep an eye on the rates banks offer.
Another thing to watch out for with high-yield savings accounts is fees. Some banks will charge a monthly maintenance fee or other fees for using certain bank account features.
Make sure you understand all of the fees associated with your chosen account before signing up.
Ultimately, high-yield savings accounts are a great way to save money while earning a higher rate of return than a traditional savings account.
They offer liquidity and safety, making them a good option for those who don’t want to take on as much risk as they would with other types of investments.
These accounts are especially good for the money you plan to use in less than five years, like a house down payment fund or a vacation fund.
Many people use high-yield savings accounts as goal accounts for that reason.
If you’re in the market for a high-yield savings account, be sure to check out CIT Bank, an online only bank with competitive interest rates.
11. Money Market Accounts
A money market account (MMA) is a type of savings account that offers a higher interest rate than a standard savings account.
They also offer more liquidity than other short-term investments, such as certificates of deposit or treasury bills.
One downside to MMAs is that they typically have lower interest rates than other types of investment options. So, they might not generate compound interest in a meaningful way like other investment options on this list.
Another thing to watch out for with MMAs is the minimum balance required to keep the account open.
Some banks will require a minimum balance to be kept in the account at all times. If the balance falls below this level, the bank may charge you a fee.
Some MMAs come with checkbooks, which can be an excellent way to access your money if you need it quickly.
These checkbooks are a key difference between a MMA and a high-yield savings account.
If you want to access money in your high-yield savings account, you usually have to transfer it to a checking account to use it.
Ultimately, a MMA is a good option for those looking for a higher interest rate than what’s offered in traditional savings accounts while still having access to their money if they need it.
Like a high-yield account, you can use a MMA to save for short-term financial goals that you know you want to achieve soon.
Consider opening a MMA with an online bank like CIT Bank. These types of banks tend to pay the highest yields due to their low fixed cost structures.
Can Compound Interest Make You Rich?
The answer to this question is yes. Compound interest can make you rich, but there are a few things you need to do to achieve this.
First, you need to start investing as early as possible, so the effects of compounding have more time to work in your favor. Investing in your 20s and 30s is an excellent idea and a decision that can seriously pay off down the road.
Remember, you don’t have to invest a lot to get started. Every little bit counts.
Secondly, invest your money in investment vehicles that offer high returns, such as stocks and mutual funds. Investing like this can also help create passive income, especially if you earn dividend payments.
Take the time to learn about various funds and your options before choosing them. The more knowledge you have, the better.
Finally, resist the temptation to spend all of your hard-earned money. Budget, plan, save and invest regularly. Please pay attention to your money and track it as it grows through compounding.
If you can do these things over time, you will likely see your wealth grow, which will help you eventually reach financial freedom.
While it takes time to become wealthy through compound interest investments, it is possible with enough time and patience.
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About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.