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How Compound Interest Helps or Hurts

Would you prefer to earn interest – or pay it? Understanding how compound interest works allows you to make better decisions in your investment portfolio and your overall financial life.

Compound interest is the ability for your money to make interest on the interest. Contributions to a 401(k) retirement plan demonstrate this perfectly. Assume you started a 401(k) account and deposited $19,500 each year (the maximum allowed contribution for 2020 for people younger than 50), and earned 10% per year. In eight years, you would be earning $22,000 per year in interest alone.

In other words, the amount you would earn in annual interest earned would surpass the maximum contribution you could contribute each year.

Sarah Goldberg
Sarah Goldberg

Sarah is a seasoned financial market expert with a decade of experience. She's known for her analytical skills, attention to detail, and ability to communicate complex financial concepts. She holds a Bachelor's degree in Finance, is a licensed financial advisor, and enjoys reading and traveling in her free time.

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