Money Market Account Archives

Compound Interest Calculator

February 5, 2021February 5, 2021 Kathryn Perkins

Compound interest is one of the most important concepts to understand in investing. Itâs something about investing that many people arenât familiar with, but it plays an essential role in making investments profitable.Â

If youâre curious about compound interest and how it works, good for you â youâre on the right track. In this post, youâll find a compound interest calculator that can quickly and clearly show you how much money you might make by investing in an account that delivers compound interest.Â

Use the calculator below to get a sense of your potential earnings, then read the sections below to gain more insight into how you can make money through compound interest.Â

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Compound Interest Calculator

First, tell us about your investment plan by filling in the fields below.

Investment Plan:

Starting Amount:

Years to Accumulate:

Contribution Amount:

Every WeekEvery Two WeeksPer MonthPer QuarterPer Year

Rate of Return:

Compound Frequency:

DailyMonthlySemiannuallyAnnually

Years to Accumulate:

Your Investment Results:

Ending Amount: $0

Total Investment

Compound Interest Earned

Simple Interest Earned

Investment Growth Over Time

Investment Breakdown

Total Investment

Compound Interest Earned

Simple Interest Earned

How to use a compound interest calculator
- Investment definitions
How does compound interest work
- Compound interest formula
Compound interest accounts
Compound interest FAQs

How to use a compound interest calculator

Using the compound interest calculator is simple. Follow these steps to see what you might earn through compound interest investing.Â

Enter your initial investment. It can be any value that you like, but itâs helpful to make it a realistic amount. For instance, if youâre saving up to invest right now, you can put the amount that you plan on investing once youâve saved up enough.Â
Next, enter the amount you plan on adding to your investment portfolio each month. This can also be any value you like, but itâs most useful if you enter an amount that you can budget for. Even if thatâs just an extra $10 a month, it makes a difference.Â
Choose whether you want your interest compounded annually, compounded monthly, or compounded daily. (If you donât know what that means, stay tuned for the definitions below.)Â
Input the estimated rate of return. This can vary considerably, but index funds and similar investment vehicles can yield between 2% and 10% returns.Â
Input your time horizon â the amount of time until you withdraw or use your investments.Â

Once youâve filled out the calculator, you should see an estimate of the amount youâre likely to have when the period of compound investing is up. If youâre a little confused about how we got this number, or what you need to do to grow your money in this way, check out the definitions, guide, and FAQs below.Â

Investment definitions

Compounding: This occurs when the money that is made from an investment is reinvested, increasing the total amount of interest yielded the next time your interest is compounded.Â

Index fund: Index funds are bundled investments that roughly track the growth of a market index, which is a collection of publicly-traded companies. They are often considered lower-risk investments.

Interest: The money you make on your investments; essentially, the money you earn for investing in the success of a company, a government bond, or a fund.

Principal: The amount of money that you start out with when you begin investing.

Rate of returns: The rate at which you accrue interest â for example, 3% returns would mean that, for every $100 invested, you would earn $3.Â

Returns: The money that you earn on your investments.Â

Time horizon: The amount of time that you plan on investing.

Now that you have a few key compound interest definitions in mind, we can explain how it works.Â

How does compound interest work

Having more money can help make you more money â thatâs the principle behind compound interest. Hereâs how that breaks down. Letâs say that you have $1000 to invest. You put it in an account (letâs say a money market account) that yields 2% interest, compounded monthly. At the end of the first month, youâd have $1020. So far, so good.

But hereâs where it gets really interesting. That 2% rate of return now applies to the $1020 total, not just the principal investment of $1000. So, after the end of month 2, youâll have $1040.40 â an added $0.40 compared to the previous month.Â

That might not sound like a lot, but it starts to add up. Have you ever rolled a snowball down a hill? The same idea applies. As your money grows and adds to itself, the amount that it can add to itself the next time your interest compounds is more. It may not be a get-rich-quick scheme, but itâs a reasonably secure way to start building your net worth in the long term.Â

Plus, youâre not limited to money market accounts with rates as low as 2%. If youâre willing to put a little more risk on the line, you can get returns as high as 10% in some cases. Weâll cover that more in a later section. But first, time for a little math homework (just for those who are curious!).Â

Looking for a longer explanation? Check out our full-length guide to how to earn compound interest.Â

Compound interest formula

Compound interest is really mathematically interesting. Hereâs the formula: A = P(1 + r/n)(nt)

If you want to try to see whatâs going on behind the scenes in our calculator, hereâs how to do the math yourself using the compound interest formula.Â

The A in the formula is the amount youâll end up with; this comes last.Â
The P in the formula above stands for your principal, thatâs the amount that you start with.Â
Multiply P by 1 + your interest rate r (given in a decimal; so 4% would be 0.04) divided by n, the number of times your interest is compounded in a given period.Â
Raise all of that to the power of n times t, where t is the number of time periods elapsed.Â
For example, if youâre investing for 12 months, and your account interest is compounded daily, n would be roughly 30, and t would be 12 if you want to know how much youâll have in a year.Â

Try the formula out yourself, and see what result you get compared to the result in our calculator to check your work!

Compound interest accounts

Now that you understand the basics of compound interest, youâre probably wondering how you harness it to increase your net worth. The key is to use accounts that offer compound interest. Here are a few examples:

High yield savings and money markets. These are essentially savings accounts. They arenât investment accounts (which weâll discuss in a minute), but they do use a similar principle to grow your money. Rates on these can be fairly low compared to other options, but your money remains accessible, so you wonât have to worry if you need access to your cash fast in an emergency.

Retirement accounts. If you have a 401k or IRA opened right now, good news: youâre already accessing the power of compound interest. Most retirement accounts use a diversified and stable portfolio to grow your money over time, investing in index funds, government bonds, and dividend stocks to help you build your nest egg.Â

Investments. Of course, one of the most aggressive and effective ways to utilize the power of compound interest is to start investing. There are a number of different ways you can invest â be sure to read our guide to investing for beginners for a more thorough explanation â but all can involve compound interest. For example:

- Dividend stocks sometimes allow you to reinvest the payout from your dividends, increasing the amount of your dividend the next time there is a payout.Â
- Index funds, like mutual funds and ETFs, also often allow investors to reinvest their earnings, harnessing compound interest in their favor.Â
- If you invest directly in stocks, you can always use the money that you earn to reinvest or invest in another stock â be aware that this is a riskier option, however.Â
- Whether you choose an in-person brokerage or a trendy new robo-advisor, youâll likely be able to use the power of compound interest to grow your capital.Â

Compound interest is a mathematical force that can help you build your net worth over time. You can get started today by finding the right investing or saving vehicle for your personal finances. And donât forget to download the Mint app, where you can conveniently track your investments all in one place.Â

Compound interest FAQs

How do I calculate compound interest?

You can calculate compound interest in one of two ways: you can use the formula listed above to calculate it by hand, or you can use the compound interest calculator to figure out your total more quickly. Just be sure you know the necessary variables:

The principal amount
Your interest rate
How often itâs compounded
The number of compounding period that will occur

What will $10,000 be worth in 20 years?

That totally depends on how much interest your account produces and whether you invest more as time goes on.Â

Letâs assume an average return rate of around 7%, and assume that you donât add in any more money. In that case, your $10,000 could turn into $40,547 â still an impressive amount. Thatâs the power of compound interest.Â

How do you calculate compound interest monthly?

To calculate compound interest monthly, simply set the âcompounding frequencyâ setting on the calculator above to âmonthly.â Alternatively, you can use the formula above and set n equal to 1 and t equal to 12 to find out how much money youâll have if interest is compounded monthly for a year.Â

Sources

Wealthsimple | Investor.gov

The post Compound Interest Calculator appeared first on MintLife Blog.

Source: mint.intuit.com

Dave Ramseyâs Baby Steps Explained

January 13, 2021January 13, 2021 Kathryn Perkins

Whereas Dave Ramseyâs Baby Steps have often been dissected one at a time, my goal in this post is to give an overview of the steps as a unit and explain why the order is essential.

dave ramsey baby steps explained

Hopefully, these steps can help you create a focused life plan for your finances, regardless of your age or financial well being.

First, the Baby Steps:

Step 1: $1,000 in an emergency fund.
Step 2: Pay off all debt except the house utilizing the debt snowball.
Step 3: Three to six months of savings in a fully funded emergency fund.
Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement plans.
Step 5: College Funding
Step 6: Pay off your home early.
Step 7: Build wealth and give.

The Power of Focus

Daveâs premise with the Baby Steps is that people can accomplish great things IF they can just be focused. When you read over these seven steps, you think, âYes. I need to be saving. But I also need to be investing for retirement. I should get my house paid off early. But I also need to be getting out of debt and saving for my kidâs college.”

You would readily agree that all of these goals are important for successful financial planning. The problem is that your stress level kicks into overdrive with the prospect of doing them all. You clench your jaw and do what you are capable of doing while feeling anxious about the goals you place on the back burner.

The Baby Steps plan works because when you stay focused on one step at a time, you can knowingly put some important goals on hold without the nagging feeling that you are leaving something undone.

You can also check out my YouTube video where I break down each of Dave’s Baby Steps here:

Why?

Because accomplishing each step puts you in a great position to accomplish the next one.

You begin to feel an empowerment and a sense of control as you get one step behind you and start the next one. You are making progress instead of treading water.

Why Are the Baby Steps in the Order They Are In?

Dave Ramsey's Baby Steps

Steps 1 and 2: $1,000 Emergency Fund and Debt Snowball

Notice that Steps 3 through 7 are all about using your money to do something positive for you and your family. Of course this money comes from your income, but the problem with most of America is that we are using our income on debt payments.

Because we are paying others instead of ourselves, we need to get rid of our debt (Step 2) in order to free up our income for Steps 3-7.

Ask yourself,

âWhat if I could use all the money I am currently paying to creditors to start âpaying myselfâ?

For many people this is $1,000 to $3,000 a month.

Baby Step 2 debt snowball is designed to do just that. Step 1 is necessary before Step 2 because you donât want to start paying off debt without having a small cushion to absorb the little unplanned expenses that will occur during Step 2.

Step 3: 3 to 6 months of Savings

After completing the first two steps, you are out of debt (except for your house) and now have that cash flow you dreamed about: all of the money you used to pay others is at your disposal. The temptation is to start investing for retirement or saving for your kid’s college or pay off your house early.

NOT SO FAST! You will get to those, but doing so prematurely is way too risky.

Stop, take a deep breath and use that cash flow to build up your emergency fund so you will indeed be ready for emergencies. This fund needs to be liquid (in a top savings account or money market account).

If you skipped the step and started any of the ensuing steps, how would you handle emergencies? Pull money from your retirement account? Rob the kidâs college savings? Borrow money against your house? All bad ideas.

Step 3 is therefore always ahead of the following steps

Steps 4, 5, and 6: Saving for Retirement, College Funding, Pay Off Home

You may be asking,

âWhy is retirement ahead of college funding? Wouldnât a good parent put his children ahead of himself?â

Good question. But what if you end up without sufficient retirement income because you made college funding a higher priority? Who will you be depending on in your later years? Your kids!

The thing about retirement planning is that you only get one shot at it. The years go by and you will someday be retirement age. You donât have a choice. On the other hand, college funding is full of choices: kids can get scholarship, they can work, they can attend community colleges, they can find work/co-op programs, etc, etc.

Step 4 is therefore ahead of step 5. But notice that Step 4 is 15% of your income. If you have cash flow greater than 15% you can apply that to college funding immediately, and if you have more than enough cash flow to accomplish both steps 4 and 5, you can use all of the extra to pay off your house early (step 6).

Note that Step 6 comes behind retirement and college funding because reversing the order could possibly give you a paid for house at the expense of a dignified retirement or helping your kids through college. Most of us wouldnât want that.

Not sure where to start investing for retirement? Here are some tips:

Best Places to Open a Roth IRA – Figuring out where to start investing your 15% of income can be confusing. A great place to start is a Roth IRA, but deciding a broker is confusing. This list will help you pick the best broker for your Roth IRA.
Best Online Stock Broker Sign Up Bonuses – You can get hundreds of dollars or thousands of airline miles just for opening up a brokerage account.
Beginner Investing Strategies – If you’ve never invested before it can be overwhelming. This list breaks down getting started into manageable pieces.

Step 7: Build wealth and give.

Life is now very good! You have no debt, a great emergency fund, and a paid for house. All of the cash flow that used to go toward debt reduction and house payments is now at your disposal.

This, by the way, is the step Mandy and I are on. Being semi-retired, we donât have a huge income, but it is very sufficient because we also donât have any debt. We continue to invest every month and we are able to give more than we have ever given before.

Once we got our house paid off, we started to budget âblessâ money, which we put into an envelope every month just to have available so we can bless others as we see the needs. We are also able to help our grown daughter and daughter-in-law cash flow their college.

As I said, life is good. Mandy and I are experiencing great financial peace and we are very grateful for Dave Ramseyâs Baby Steps.

I wish the same for you.

This article is a general overview of what Dave Ramsey has to offer and is not intended to replace his course, nor is this sponsored or endorsed by Dave Ramsey or the Lampo Group.

The post Dave Ramseyâs Baby Steps Explained appeared first on Good Financial CentsÂ®.

Source: goodfinancialcents.com

Money Market Account or Checking Account: Which Is Best For You?

January 12, 2021January 12, 2021 Kathryn Perkins

If you’re looking for a new bank account that allows you to easily store as well as access your cash, you might be thinking about opening a money market account or checking account. But how do you know which to choose? Decisions, decisions. Both types of accounts have unique advantages, depending on your savings and spending goals.

âThink about how you will be using the money within the account,” says Jill Emanuel, lead financial coach at Fiscal Fitness. “Is this money for daily, weekly or monthly use? Or is it money that will not be needed regularly?”

When comparing a money market account vs. a checking account, consider how often you'll need to access the funds in the account.

You’ll probably need a little more to go on before answering the question, “How do I decide between a money market account or checking account?” No worries. Our roundup delves into the features of both types of accounts to help you determine which one could be right for your financial plans, or if there’s room for both in your money mix.

Get easy access to your funds with a checking account

In simple terms, a checking account allows you to write checks and make purchases with a debit card from the money you deposit into the account. That debit card can also be used to withdraw cash from the account via an ATM.

When deciding between a money market account or checking account, Emanuel says most people use a checking account for the primary management of their monthly income (i.e., where a portion of your paycheck is deposited) and daily expenses (often small and frequent transactions). âA checking account makes the most sense as the account where the majority of your transactions occur,” she adds. This is because a checking account typically comes with an unlimited number of transactionsâwhether you’re withdrawing cash from an ATM, transferring money to a savings account or swiping your debit card.

While a checking account is a good home base for your finances and a go-to if you need to easily and quickly access your funds, this account type typically earns little to no interest. Spoiler: This is one key difference when you compare a money market account vs. a checking account.

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âIf you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use.â

– Bola Sokunbi, certified financial education instructor and founder of Clever Girl Finance

Grow your balance with a money market account

When you’re comparing a money market account vs. a checking account, think of a money market account as a savings vehicle that allows you to earn interest on the balance you keep in the account.

“A money market account is an interest-bearing bank account that typically has a higher interest rate than a checking account,” says Bola Sokunbi, certified financial education instructor and founder of Clever Girl Finance.

With some money market accounts, you can even earn more interest with a higher balance. Thanks to its interest-earning potential, a money market account can be the way to go if you’re looking for an account to help you reach your savings goals and priorities.

If you’re deciding between a money market account or checking account, you may think that a money market account seems like a typical savings account with your ability to earn, but it also has some features similar to a checking account. With a money market account, for example, you can withdraw cash from an ATM and use a debit card or checks to access money from the account. There are no limits on ATM withdrawals or official checks mailed to you.

You can withdraw cash from ATMs and write checks with a money market account or checking account.

Before you decide to use this account for your regular bills and your morning caffeine habit, know that federal law limits certain types of withdrawals and transfers from money market accounts to a combined total of six per calendar month per account. If you go over these limitations on more than an occasional basis, your financial institution may choose to close the account.

Don’t need regular access to your funds and want your money to grow until you do need it? Then the benefits of a money market account could be for you.

Deciding between a money market account or checking account

Still debating money market account or checking account? Here are some financial scenarios to help you determine which account may best suit your current needs and goals:

Go with a checking account if…

You want to keep your funds liquid. If you’re thinking money market account or checking account, know that a checking account is built for very regular access to your funds. âIf you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use,” Sokunbi says. Think rent, cable, utilities, groceries, gas, maybe that morning caffeine craving. You get the idea.
You want to earn rewards for your spending. When you’re comparing money market account vs. checking account, consider that with some checking accountsâlike Discover Cashback Debitâyou can earn cash back for your debit card purchases. The best part is you are earning cash back as you keep up with your regular expensesâno hoops to jump through or extra account activity needed. Then put that cashback toward fun things like date night, lunch at your favorite spot or a savings fund dedicated to something special.

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Learn More

You want to deposit and withdraw without the stress of a balance requirement. If you do your research when comparing money market accounts vs. checking accounts, you’ll find that some checking accounts don’t require a minimum balance (or much of one). However, you may be required to maintain a minimum balance (and potentially a higher one) with a money market account in order to avoid a fee. If you’re accessing your money frequently and need to make large withdrawals, a checking account with no minimum balance requirement is a convenient option.

Go with a money market account if…

You want to earn interest. âIf your money is just sitting there, it should be earning money,” Emanuel says of the money market account or checking account question. âI spoke with a woman recently who told me she’d had around $50,000 sitting in her checking account for at least the last 10 years, if not longer. If that money had been in a money market account for the same period of time, she would have earned thousands of dollars on it. Instead she earned nothing,” Emanuel says.
You want to put short-term savings in a different account. If you have some short-term savings goals in mind (way to go!), you may benefit from keeping your savings separate from your more transactional checking account so you don’t dip into them for a different purpose. That whole out of sight, out of mind thing. âA money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritance or proceeds from selling a home,” Emanuel says.
You need an account to fund your overdraft protection. If you’re comparing money market account vs. checking account, consider that a money market account could also cross over to support spending goals. One way is in the form of overdraft protection. If you enroll in overdraft protection for your checking account, for example, you could designate that funds be pulled from your money market account to cover a balance shortfall.

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âA money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritanceÂ or proceeds from selling a home.â

– Jill Emanuel, lead financial coach at Fiscal Fitness

Using both accounts to achieve your financial goals

Speaking of crossover. Both spending and saving are vying for your attention, right? Consider leveraging both types of accounts if you have needs from the checking and money market account lists above.

“Personally, I use my checking account for bill payments, my day-to-day spending, writing checks and for any automatic debits I have each month,” Sokunbi says. She’s added a money market account to the mix “because of the higher interest rateâto store my savings for short-term goals, for investing or for money I’ll be needing soon,” she explains. Maybe it’s not about deciding between a money market account or a checking account, but getting the best of both worlds.

Before opening a money market account or checking account, do your research and compare your options to see which bank offers the best package of low or no fees and customer service, in addition to what you need from an interest and access to cash perspective.

The post Money Market Account or Checking Account: Which Is Best For You? appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com