How You Can Make Your Money Work Like Magic For You

What if there was a way to make your money magically multiply?

Money magic might seem mythical. (Okay, we’ll stop with the “m” words now!) But while it’s true that there aren’t any magic wands or spells to give you money instantly, there are ways to make your money work harder for you.

Enter compound interest. Compound interest is literally a magical tool–Gandalf not included–that can significantly grow your money over time without your having to lift a finger.

Discover below what compound interest actually is and how you can use it to make the most of your money.

What is compound interest?

Compound interest is a financial term, but it can apply to all kinds of things in life. Basically, compound interest means that you earn more than you invest over time.

Compound interest is the key to not only money but also friendships, skills and just about everything else.

Here’s an example: Say that you decide to learn how to play the bass guitar. Unless you’ve already had musical training, you’re probably not going to sound great…at first.

You start practicing for hours on end. You make tiny progress and get comfortable with the chords for “Mary Had a Little Lamb.” After significant practice and time, your efforts “compound,” and suddenly you’re jamming out to your favorite Taylor Swift songs.

Here’s another example: You post a funny 15-second video on TikTok. A few friends watch your video and share it with more people. The video generates or “compounds” views the more it’s watched or shared. Soon you have thousands of views!

When it comes to your money, compound interest works the same way. Let’s say that you contribute money into a standard mutual fund (a type of investment earning compound interest that lets you invest in stocks, bonds, etc.).

Interest (aka more money) is added to your original deposit by the day, week, month or year. The amount depends on the interest rate, or the extra money you get for investing.

Here’s the best part: Your original deposit earns interest, but also, through the magic of compounding, your interest earns interest of its own! In short, you can earn a lot more money than what you put in.

Where can I earn compound interest?

Compound interest can be earned by placing your money in different financial accounts.

Two common types of accounts that offer compound interest are Certificates of Deposit and money market or interest-bearing checking accounts.

But to earn a higher interest rate, there are other options such as standard mutual funds, index funds or investing directly in stocks.

When you invest your money with one of these options, your money earns interest, and your interest earns interest.

How to use compound interest to turn $50 into $1,000

That’s right…you can use compound interest to magically turn $50 into $1,000 in just five years. Let’s look at another example.

Say that you just received $50 for your birthday. If you keep your money in your pocket or spend it, then it’s not going to grow. Compound interest + time can help.

You decide to invest this $50 into a mutual fund that earns a 6% interest rate. The interest is compounded monthly, which means that any interest you earn is added back to your original deposit each month on top of any interest you earned the previous month.

You also decide to make $15 deposits into the account every month with allowance money.

After two years, you’ll have over $430. Now, time is your best friend with compound interest…the longer you let your money compound interest, the more you’ll have. If you let your money grow for five years, then you will have over $1,100 and will have earned over $160 in interest!

Here’s how the math breaks down for your money at the end of each year:

Year 1: $238 ($230 in contributions, $8 in interest)
Year 2: $437 ($410 in contributions, $27 in interest)
Year 3: $649 ($590 in contributions, $59 in interest)
Year 4: $874 ($770 in contributions, $104 in interest)
Year 5: $1,113 ($950 in contributions, $163 in interest)

And get this: If you continue contributing $15 to the account, then you will have over $15,000 in 30 years and will have earned almost $10,000 in interest! It’s pretty impressive what $50 in birthday money and $15 per month can do thanks to compounding.

This amount will be much larger if you contribute more money to the mutual fund every month. If you’re not taking advantage of compound interest yet, then you’re missing out on money!

Harness the power of compound interest

Albert Einstein once said, “Compound interest is the most powerful force in the universe.”

We have to agree. Over time, compound interest can literally make you a millionaire. The magic tricks are to let your money earn compound interest sooner rather than later and to have the patience to let compound interest do its thing!