Building a comfortable nest egg takes time and careful planning. If you play your cards right, you can have a reasonable sum to enjoy your golden years when you’ve retired.

Of course, to get there, there’s a lot of prep work. People don’t achieve a financial goal without a little investment. Investing is that extra push that can help you grow wealth long-term, so you don’t have to toil away later.

Compound interest investments are one of the best ways to invest your hard-earned money and accumulate wealth.

Continue reading to learn more about what compound interest is, how it works, and the seven top compound interest investments that can help boost your retirement savings and grow your nest egg.

How Does Compound Interest Work?

To explain how compound interest works, consider the following example: an initial investment of $1,000 with a 5% interest rate compounded annually. After Year 1, your initial $1,000 investment will accrue $50 in interest, resulting in a total of $1,050. In the second year, you would earn $52.50 in interest based on the new total of $1,050, bringing the total to $1,102.50.

Naturally, the longer the investment period and/or the higher the compounding frequency (e.g., three months versus six months), the greater your earnings, assuming positive interest rates. Add on monthly contributions from discretionary income, and you can greatly increase the amount of money you have in any account.

In short, reinvesting the interest you earn will significantly boost the growth of your initial investment over time.

Benefits of Compound Interest

Passive Income. With interest earned on top of interest over time, minimal work is required other than occasional performance oversight, resulting in an excellent source of passive income.

Reinforcement of Saving Habits. Observing interest earning more interest incentivizes regular saving even further, potentially motivating you to save a higher percentage of your earnings each month.

Psychological Benefits. As your savings and earnings grow, your confidence and peace of mind increase, fostering a healthy mindset toward money management.

 


Consult with Horizon Trust


What Are Compound Interest Investments?

Compound interest investments are bank-type or money market assets that compound over time. It’s the process by which an asset’s earnings (from capital gains or interest) are reinvested to generate more money. Essentially, compound interest is the interest where assets earn money that is put back in for a bigger long-term payout.

Funds are calculated with the initial investment and the accumulated funds. Rather than earning funds from linear growth, it refers to an asset’s increasing value due to the principal’s interest and accrued interest. So, when your investment grows, it compounds and brings in more capital for your nest egg. These investments can be short-term or long-term; depending on how risky you want to get, you can receive a decent return on your investment.

Top 7 Compound Interest Investments

Here are seven compound interest investments that can boost your savings:

1. CDs

Considered a safe investment, banks issue certificates of deposit and generally offer higher interest than savings, typically FDIC-insured up to $250,000. These CDs pay you interest at regular intervals. As they mature, you get both the principal and the interest. Your money is tied up in these CDs until your account reaches maturity, but these are a safe investment if you don’t need the income immediately.

2. High Yield Savings Accounts

A high-interest or high-yield savings account is a good investment for those who need cash quickly. While they may cost more than other investments, they earn a higher interest rate, making it worth the extra money. With a high-interest savings account or money market account, owners earn interest on their money based on their deposits. Add money, gain interest, and most accounts have a competitive interest rate.

3. Rental Homes

Rental properties are a great way to pull in passive income. However, the downside of this investment is that, as the property owner, you have to manage your asset. Properties must be maintained; money can only be made if your rental is filled.

If you have a reliable tenant and a well-cared-for property, rental homes can pull in excellent passive income. Though this option is less liquid than others on this list, if you pay down the mortgage, this asset can bring in long-term, steady cash flow.

4. Bonds

Bonds can make an excellent compound interest investment, but before you go and buy up a ton, know that there are many different bonds with varying risk factors. Government bonds are the lowest risk, and the U.S. government backs them. It’s subject to the fluctuating economy but has liquidity and can be very beneficial.

The state issues municipal bonds, which carry slightly more risk than government bonds. Cities and states back these and rely on the municipalities you buy them from. Short-term corporate bonds have the highest risk. They also have the highest reward. They are backed only by the corporation and are short-term investments. There’s no telling what will go on in a year. Be cautious with your selection, and your account can benefit.

5. Stocks

Rather than playing the bond market, you could try your hand at the stock market by purchasing individual non-dividend stocks, dividend stocks, or an S&P 500-based index fund or exchange-traded funds (ETFs). If you want more from your stock investments, dividend-paying stocks have an additional payout. Of course, you must select your stocks wisely. You need to pick the right stocks to get your desired dividend boost.

You can also go with preferred stocks. These aren’t traded as often as regular stock options and are all based on your selected stocks. If you know the stock market, this asset may be perfect.

6. Treasury Securities

The government sometimes needs money to pay debts, invest in projects, or plan the next big thing. You can be a part of that by purchasing treasury bills.

These are sold at face value, but owners are compensated at full value when they mature. Treasury notes are issued, and owners can hold them for a few months for a quick turnaround. Don’t sell them before they’ve reached maturity; otherwise, you may take a loss.

7. REITs

If you like pulling in rent money but aren’t keen on managing property, REITs are the next best thing. Real Estate Investment Trusts, or REITs, are a company that owns and operates real estate. REITs bundle property in metros as far and wide as Salt Lake City, Lincoln, and Austin and manage them for investors who take a cut from any interest gained on their investment. This investment acts as passive income, and as long as you stick to publicly traded companies, you can benefit from this investment long-term.

How to Use the Rule of 72 to Scale Your Portfolio

One of the simplest and most powerful investment concepts is the ‘Rule of 72,’ which helps evaluate investment opportunities.

The Rule of 72 estimates the number of years for an investment to double in value by dividing the annual interest rate/growth rate by 72. For example, with an 8% growth rate, it would take nine years to double your investment (72 divided by 8 equals 9).

Applying the Rule of 72 enables you to set realistic investment goals and assess risk versus return in line with your overall investment strategy. It also serves as a useful benchmark for performance monitoring.

Please note that the Rule of 72 is an approximation and assumes a constant growth rate, which may not be achievable due to market fluctuations, taxes, inflation, investment fees, and other variables.

In summary, applying the Rule of 72 helps set targets and track investments to achieve your financial objectives.

Adding Compound Interest to Your Retirement Account

One effective strategy to add compound interest to your retirement account is through Self-Directed IRAs (SDIRAs).

SDIRAs are individual retirement accounts that allow you to invest in assets beyond traditional stocks, bonds, and mutual funds. They emphasize alternative investments such as precious metals, tax liens, private equity, and real estate, which offer the potential for higher returns.

These assets have significant compound interest potential. By reinvesting SDIRA dividends, rental income, and earnings from these investments, you can compound your returns over time.

Depending on the type of SDIRA (e.g., Traditional IRA or Roth IRA), you can enjoy tax-free or tax-deductible contributions, further enhancing the growth of your investments. Diversification is another benefit, mitigating potential losses by avoiding a concentrated portfolio limited to one or two asset types (e.g., stocks and bonds), which historically yield lower returns compared to alternative assets like cryptocurrency and real estate.

In summary, generating compound interest using SDIRAs is a solid investment strategy that yields substantial dividends. Ensure thorough research on each investment and stay updated on all IRS regulations related to self-directed retirement accounts, including minimum balance requirements.

Compound interest investing is a great way to build your account with a little help from the assets. Over time, the money accrued should accumulate into a comfortable nest egg for your golden years. Of course, as with any investment, you should consult the advice of your trusted financial advisor. Investing doesn’t have to be difficult. Perform your due diligence, and start investing in your future.

FAQs

What are the best compound interest investments?

The best compound interest investments are those that align with your individual goals and retirement horizon. Popular long-term options include stocks, bonds, mutual funds, and SDIRA alternative assets like tax liens, real estate, and cryptocurrency, all with significant potential for compound interest growth.

Can real estate be a good compound interest investment?

Absolutely, real estate is an excellent choice for compound interest investment. Rental properties generate regular income, which can be reinvested, and property values appreciate over time, amplifying the impact of compound interest.

Are retirement accounts good for compound interest?

Yes, retirement accounts like IRAs and 401(k)s are ideal for earning compound interest. These investments provide the added benefit of tax-deferred or tax-free contributions, earnings, and dividends until withdrawal, either before or after reaching retirement age. The earlier you start investing in IRAs and 401(k)s, the greater the potential for compound interest earned.