Put your money into a savings account
Maybe you already have a savings account and this advice seems obvious, or maybe you sleep on a pile of gold like the dragons of old.
Regardless of your current situation, I hope this page can help you marginally improve your finances by understanding and taking advantage of compound interest — and how banks calculate it.
Below is a tool for calculating how much interest you can earn with a savings account — and below that is an explanation of compound interest and a tip I learned while researching this tool that could help you save entire pennies every year.
What is compound interest?
Compound interest is when you earn interest on both your original investment and the interest that has already been added to it.
So, if you invested $10,000 with a yearly interest rate of 4% — by the end of the first year you'd have $10400. Very nice.
But by the end of the second year you'd have $10,816
So, in the first year you'd earn $400 in interest, but in the second year you'd earn 4% interest on that $400 too, meaning you'd earn $416 — an extra $16.
The more time goes by the amount gets exponentially larger — after 20 years your yearly interest will be $842.70. After 100 years you'll earning $19,424.98 a year.
That's how it works, but most people don't have $10,000 and aren't immortal. So, combining regular contributions to your savings, and reducing your expenses can help you reach a large amount before you are a skeleton.
You could, for instance, perform one-off actions you read about on this very website — like adjusting the temperature of your boiler or pretending to cancel digital subscriptions.
A very useful tip
Banks calculate your interest by averaging the amount you have in your account at midnight.
So, since my bank has a very usable app — it's easy for me to put the contents of my checking account into my savings before midnight each night, then the next morning I put the amount I'll need that day back into my checking account.
I have literally made pennies by doing this.
If you added an extra $10 to your account each night, and back out again each morning, after 10 years you'd have around $5 extra.