5 Best Compound Interest Investments

Compound interest is a wise investment strategy that earns you interest on interest. While it accelerates your investment and savings over time, it also expands your debt balance. To understand and calculate compound interest effectively, there are vital variables you should familiarize yourself with, including interest, starting principal, compounding frequency, durations, withdrawals, and deposits because some of them can significantly affect your returns.

For compound interest to work for you, start saving early to give your money time to grow, pay your debts aggressively, compare annual percentage rates (APYs) to determine how much you'll be charged or earn in interest, and check the compounding rate as the more regularly your account compounds interest, the higher the earnings will be. Below are the five best compound interest investments.

1. Real estate investment trusts (REITs)

REITs are an excellent way to invest in real estate without owning a property and diversify your investment portfolio. They pay about 90% of their taxable income to the shareholders yearly as dividends. You should reinvest your share to earn interest over time to enjoy the compounding benefits. However, real estate investment trusts are sensitive to interest rate fluctuations which disproportionately impact the real estate market. While REITs can net high returns over time, they aren't a good choice if you're looking for low-risk compound interest accounts.

2. Mutual funds

Mutual funds involve companies pooling money from multiple investors and investing it in securities like bonds and stocks. As an investor, you buy shares in a mutual fund, with each share representing part ownership and the income it earns. Mutual funds are an excellent compound interest investment choice because they're professionally managed and promote diversification, reducing investment risks. They're affordable and highly liquid, meaning you can redeem your shares anytime.

3. Certificates of deposit (CDs)

Certificates of deposit are an excellent investment avenue for new investors wishing to leverage compound interest immediately with as low risk as possible. They're given by commercial interest. Certificates of deposit have restricted access to the funds you invest for a predetermined time, but their interest rates are much higher than that of regular saving accounts.

The CD earns value over a set period. However, withdrawing before the lapse of that time may attract some fees. A certificate of deposit's term length can be from three months to five years. The longer the term of your CD, the higher the interest rates earned.

4. High-yield savings accounts

High-yield savings accounts are similar to traditional ones but pay a higher yield on your investment. You can withdraw your money as needed, but the bank can charge a fee for exceeding a specific number of monthly withdrawals. High-yield savings accounts are a good investment choice because they earn better annual percentage rates than other savings alternatives. Since online banks offer them, you might not pay maintenance fees because their overhead costs are usually low, saving you money.

5. Money market accounts

Money market accounts are like savings accounts, except they give you debit cards and check writing privileges, making it easier to access your assets. Their interest rates are higher than standard savings accounts. Money market accounts may limit the number of monthly transactions you can complete and could charge you a fee should the balance fall below a specific amount.

Endnote

Compound interest accounts are an excellent way to grow your investment. Consider investing in these compound interest investments to enjoy their benefits.