The best compound interest investments help your money grow exponentially faster than other forms of investments because compound interest is probably the most effective and important concept to build wealth for the long term.
If you put your money in an account that earns compound interest, then you’ll see your money grow exponentially. This is because compound interest allows you to earn interest on interest giving your savings a chance to earn more money.
So, if you want to take full advantage of compound interest, it is important to know how compound interest works and what are the best compound interest investment accounts.
Let’s explore compound interest and the Best Compound Interest Investment accounts you can sign up for.
What is Compound Interest & How it Works?
Compound Interest is the interest you earn on the interest. This means it is the money you earn on principal as well as on the interest that you earn over time. Your money grows at a much faster rate for the longer time you invest and more frequently when it’s compounded. The earning depends on the interest rate you receive.
Compound interest allows your money to grow over time according to the interest rate you received, which then multiplies year over year resulting in growing your money fast.
Let’s understand with an example:
Let’s assume have invested $1,000, and receive an interest rate of 5% for the first year. You will earn $1,050 in the first year. But in the second year, you will earn 5% on $1,050 (both $1,00 and the 5% interest), which means a total of $52.50. This means you will have a total amount of $1,102.50 in the second year.
The key point about compound interest is that your money snowballs over time. Your money grows more rapidly if it’s compounded.
This illustration will help you to see the power of compound interest by taking the above example as a reference:
| Year | Principal Amount | Interest (5%) | Total amount |
| 1 | $1,000 | $50 | $1,050 |
| 2 | $1,050 | $52.50 | $1,102.50 |
| 3 | $1,102.50 | $55.13 | $1,157.63 |
| 5 | $1,215.51 | $60.78 | $1,276.29 |
| 10 | $1,628.90 | $81.45 | $1,710.35 |
Compound Interest Formula
Let’s understand the compound interest formula and the meaning of each term:
Compound Interest: A = P(1 + R/N)^(N*T)
Where:
- P = Principal amount
- A = Account Value or Future Value
- R = Annual Interest Rate
- N = Number of times interest is compounded per year
- T = Number of years
- Importance of Compound Interest in Wealth-Building
Compound interest is a strong financial tool that plays an important role in building your wealth. It acts like a silent superhero where the interest earned on interest and investment is added to the principal amount and is calculated as a new total.
Here are some key aspects of why the compound is important for wealth-building:
- Exponential Growth: The best benefit you get from compound interest is that your money grows exponentially. This is because you earn interest on interest and the amount you invested, therefor your money grows very fast. Unlike simple interest, you only earn interest on the invested amount, while compound interest earns interest on both your principal amount and interest.
- Time is your Greatest Asset: Compound interest shows its real power with time. The earlier you start investing, the more your money grows with time. In short, the earlier your money has to be compounded, the more wealth you will gain.
- Source of Passive Income: Compound Interest is the greatest source of passive income. Once you start investing your money, your money continues to grow without any constant effort.
- Long-Term Goals: The power of compound interest particularly works for achieving long-term goals like retirement, education funds, or building long-term wealth.
What are the Best Compound Interest Investments
Although all types of compound interest accounts exist, some may work better for you. Here are some of the best Compound Interest Investment accounts for taking the maximum benefit of compounding by reinvesting your earnings:
1. High-Yield Savings Accounts
High-yield savings accounts are popular types of savings account that offers higher interest rates compared to other traditional savings accounts. High-yield savings accounts come with a low minimum balance requirement and the account allows you to earn interest on deposits until you withdraw the money.
Usually, the best online bank accounts offer high-yield savings accounts with high interest rates with no hidden charges. A high-yield saving is secured and insured with the Standard Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
You can easily manage your money in a HYSA through transfers or withdrawals.
Here are some best high-yield savings accounts to consider:
| Saving Account | Annual Percentage Yield | Minimum Balance |
| Brio Direct | 5.35% | $5,000 |
| TAB Bank | 5.27% | $0 |
| ufb DIRECT | 5.25% | $0 |
| Popular Direct | 5.20% | $0 |
| EverBank | 5.15% | $0 |
| Bask Bank | 5.10% | $0 |
| Upgrade | 5.07% | $1,000 |
| CIT Bank | 5.05% | $5,000 |
| Synchrony | 4.75% | $0 |
| Sofi | 4.60% | $0 |
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2. Stock Market
Index Fund
An Index Fund is a type of mutual fund investment that tracks the performance of a particular market index such as the Standard & Poor’s 500 Index (S&P 500) or the whole stock market. Instead of single stocks, the index funds contain all the stocks in the chosen index with low operating expenses and low portfolio turnover.
Various studies show that over the long term, index funds outperform actively managed funds due to their low fees and capturing overall market growth.
Best Index Funds to consider:
| Fund Name | Minimum Investment | Expense Ratio | 10-Yr Avg. Annual Return |
| Vanguard 500 Index Fund Admiral Shares (VFIAX) | $3,000 | 0.04% | 11.9% |
| Fidelity Nasdaq Composite Index Fund (FNCMX) | $0 | 0.03% | 14.5% |
| Vanguard Total Stock Market Index Fund Admiral (VTSAX) | $3,000 | 0.04% | 11.3% |
| Schwab S&P 500 Index Fund (SWPPX) | $0 | 0.02% | 11.9% |
| USAA Victory Nasdaq-100 Index Fund (USNQX) | $3,000 | 0.45% | 17.0% |
Dividend Stocks
Dividend stocks are shares of companies that contribute a portion of their profits to shareholders regularly, which is quarterly or annually. In this way, dividend stocks can be one of the best ways to generate income from your investments.
Many brokers offer a dividend reinvestment program (DRIP) that reinvests dividends automatically when you earn by buying more shares of the company’s stocks. Plus, many companies can pay dividends to their shareholders.
However, stocks can be a good way of investing for compound growth, but dividend stocks may be even better because dividend stocks can keep increasing value while paying out dividends, also the investment can earn compound growth if your payouts are reinvested.
Popular companies like Procter & Gamble (PG), Coca-Cola (KO), and Walmart (WMT) have long histories of paying reliable dividends.
| Company Name | Divident Yield |
| Silvergate Capital | 235.36% |
| LoanDepot | 191.24% |
| Arcadium Lithium | 121.46% |
| Big 5 Sporting Goods Corp (BGFV) | 16.54% |
| Arbor Realty Trust Inc. (ABR) | 13.61% |
| Chicago Atlantic Real Estate Finance Inc (REFI) | 13.22% |
| Dynex Capital, Inc. (DX) | 12.98% |
| Pennymac Mortgage Investment Trust (PMT) | 11.82% |
Growth Stocks
A growth stock is a share of any company that is predicted to grow at a rate significantly higher than the average growth for the market. These stocks often attract investors for capital appreciation through increasing share prices.
The issuers of the growth stocks are usually the companies that wish to reinvest in any form to gain growth in a short period. Investors in growth stocks earn money through capital gains when they sell their shares in the future.
These are the best growth stocks for long-term growth:
| Company | Performance in year |
| Super Micro Computer Inc (SMCI) | 685.81% |
| GigaCloud Technology Inc (GCT) | 301.54% |
| Abercrombie & Fitch Co. (ANF) | 260.77% |
| Applovin Corp (APP) | 225.91% |
| e.l.f. Beauty Inc (ELF) | 179.55% |
3. Real Estate
Rental Properties
Rental properties are a type of real estate investment in which the properties are purchased by investors on a lease or other type of rental agreement,
Investment in rental properties can be a great way to build wealth along with a great source of passive income. Rental properties can be a great option for investment. Unlike stocks and other financial options, many people have firsthand buying experience with both the rental market and the residential real estate market as homeowners.
Rental properties can provide monthly cash flow and long-term returns on the income that investment produces.
Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) is a type of investment that allows individuals to invest their money in large companies that own, operate, or finance real estate.
Investments in REITs are very similar to the investment in mutual funds as you buy shares and own a piece of the profit. If the value of REITs goes up with time, your investments earn compound interest.
REIT investments are a great way to diversify your portfolio that allows you to invest in real estate without buying the property. According to the law, REITs are required to pay at least 90% of their taxable income to their shareholders as dividends every year.
4. Certificates of Deposit (CDs)
If you’re a beginner and want to start investing with the benefit of compound interest right with as low risk as possible, then Certificates of Deposit (CDs) and savings accounts can be the best option for you.
In general, Certificates of deposit (CDs) are a type of savings accounts that offer guaranteed interest rates in exchange for depositing your money for a certain period. These types of savings accounts are offered by the banks. Certificates of deposit (CDs) require a deposit of minimum deposit and offer you high interest at regular intervals.
CDs are good for people who have specific savings goals, want safety as a priority, and guaranteed returns. CDs are also insured by the Federal Deposit Insurance Corporation (FDIC) along with the National Credit Union Administration, up to $250,000 per depositor, per insured bank.
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5. Money Market Accounts
Money Markers accounts (MMAs) are a type of bank savings account offered by credit unions and traditional banks that come with features of checking and savings accounts. Some accounts also come with a debit card.
While high-yield savings accounts and CDs offer higher interest rates than traditional savings accounts, the money market accounts offer both savings account benefits with debit card benefits. This allows you to earn higher interest rates than other forms of savings accounts.
Money market accounts are also protected by the Federal Deposit Insurance Corporation (FDIC) or NCUA if your bank is registered with a credit union. The interest rate in Money Market Accounts can be competitive which makes it easy to earn compound interest on your deposits.
6. Mutual Funds
A mutual fund is a type of investment vehicle that collects or pools money from many investors to invest and purchase securities like assets, stocks, bonds, or other types of securities. Mutual funds allow investors to access a wide variety of investment options at once.
However, mutual funds do not earn compound interest rates, but they do have a compound growth. But, remember investing in mutual funds can be and you can lose money in the short term.
7. Bonds
Treasury Bonds
Treasury bonds, also known as T-bonds, are a type of debt securities issued by the U.S. government. Treasury bonds can have a maturity period of 20-30 years. These types of bonds are considered one of the safest investments because they are risk-free and backed by the U.S. government.
Corporate Bonds
Corporate bonds are a type of debt security issued by a corporation and then sold to investors. The corporate bonds will receive the capital it needs in return. These bonds are IOUs that you sell to investors.
In terms of investments, high-quality corporate bonds are considered as safer and more conservative investments than other types of bonds.
8. Retirement Accounts
401(k) Plans
A 401(k) plan is a popular retirement savings plan or account offered by many American employers in the United States. The plan is named after a section of the U.S. Internal Revenue Code (IRC).
In this plan, the employer who signs up for a 401(k) plan agrees to get a percentage of each paycheck that is paid directly to the investment account. These plans are a great tool for leveraging compound interest to grow your wealth for the future.
Individual Retirement Accounts (IRAs)
An individual retirement account (IRA) is a powerful long-term savings account for building wealth. Individuals can earn income for the future with many tax advantages. These accounts are mainly designed for self-employed people who do not have access to workplace IRA accounts like 401(k), which is offered only by employers.
Depending on the type of IRA, you can cut some or all of your contributions from your taxed income which lowers your tax bill in the year you contribute.
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Risk vs. Return Profile in Various Compound Interest Investments
Keep in mind, no single “best” compound interest investment for everyone because the ideal choice depends mainly on risk tolerance, investment goals, and time duration. You must understand the risk vs. return profile in different Compound Interest Investments. Here’s how:
Low Risk with Low Return Investments:
| Investments Account | Return Profile |
| Savings Accounts | Highly secured with federal support, but minimal returns |
| Certificates of deposit (CDs) | Guaranteed fixed interest rate for a fixed period |
| Money market accounts | Offer more return than a savings account |
Moderate Risk with Moderate Return:
| Investments Account | Return Profile |
| Bonds | REITs can be affected by market fluctuations, but offer high returns over time |
| Real estate investment trusts (REITs) | Source of regular income source, but fluctuates with market risks |
| Dividend-paying stocks | Source of regular income source, but fluctuate with market risks |
Higher Risks with Higher Potential Return:
| Growth stocks | Offers potential growth, but prices can be highly volatile with market fluctuations |
| Emerging market investments | High potential returns due to faster market growth, but risks are subjected to market |
How To Earn Maximum Compound Interest?
Now, we’ve covered some of the best compound interest accounts that let you earn maximum interest rates according to your investments. But, you can earn maximum interest rates by following the below steps on several types of accounts.
Understand the below steps to earn the maximum compound interest rate:
#Step 1. Choose & Open an account: The first step to start is to compare and choose the best compound interest accounts that fit for your investment goals with the risks of tolerance. After choosing, open an account that earns compound interest. You can easily open a high-yield savings account or a CD account online by providing some basic personal information like your Social Security number (SSN).
#Step 2. Starting By Investing some money: Now, you need to invest some money to start earning compound interest. Various accounts have a minimum amount to invest. In general, some CDs require a minimum deposit of $1,000 or more.
#Step 3. Continue Investing: If you want to earn compound interest, start by investing an initial sum of money. To earn compound interest even more you need to keep investing money for some time.
#Step 4. Keep your money to grow: This is one of the most important steps to grow money. Leave your money to grow over time. Because compound interest becomes more powerful with time due to its nature.
Common Mistakes to Avoid
If you want to get maximum growth through compound interest, it’s important to know common mistakes while investing in the best compound interest investments. Here are some common mistakes to avoid:
- Not doing research: You should not blindly follow trends in something you don’t understand. Do your research wisely, analyzing risks, returns, and flexibility of your goals.
- Chasing high returns: Depending mainly on high returns accounts without taking into account their risks can lead to huge losses. It’s very important to create a balance between returns and the level of risk.
- Not Diversifying: Relying heavily on a single or a limited investment account can be risky. Consider diversifying your portfolio across various assets and investment types to reduce risks and get positive performance. So, the moral is don’t put all your eggs in one basket.
Bottom Line – Best Compound Interest Investments
Although, the result of compound interest seems small and slow, don’t be dare to get started. Continuous small investments can result in significant growth over time.
Less risky compound interest investments like high-yield savings accounts or CDs can be better options, but let you earn a lower return. While other options like dividend stocks and REITs can earn you a higher return.
But, the most important thing to remember is that compounding will not work without long-term investments.
FAQs:
What is Compound Interest?
Compound Interest is the interest you earn on the interest. This means it is the money you earn on principal as well as on the interest that you earn over time.
What are the different types of investments that offer compound interest?
1. High-Yield Savings Accounts
2. Dividend Stocks
3. Certificates of Deposit (CDs)
4. Money Market Accounts
5. Mutual Funds
6. Real Estate Investment Trusts (REITs)
7. Bonds
What are the best low-risk compound interest investments?
CDs, High-yield savings accounts, and bonds offer steady and reliable returns with minimal risk.
How to maximize compound interest return?
To maximize the compound interest return, start early, open an account, start with small investments, and leave your money to grow.