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The Magic of Compounding Interest

Okay—compounding interest isn't exactly magic—but it does let your money work for you, which can seem pretty magical.

Compare these three ways of managing your money to see why compounding interest will boost your savings in the long run.

1. You do all the work

Account balance = $3,640; interest earned = $0Roll your mouse over the jar of money.

You save your spare change daily and say it adds up to seven dollars a week. You do that for 10 years, and keep it in a jar in your room.

Roll your mouse over the image on the right to reveal how much you will save (your account balance) that way.

Simply saving money—that is, just not spending it—really adds up. But your money isn't working for you yet.

2. Weekly investments work

Account balance = $4,072; interest earned = $432Roll your mouse over the credit union.

Collect your spare change every day in a box or jar.

Then, take $7 out once a week and invest it in an account at your credit union.

This is called a periodic investment. Assume the interest rates stay fixed at 2.2%.

Roll your mouse over the image on the left to reveal the total amount of money you'll have in your account after 10 years. Compare that amount to how much money you'd earn by just keeping your money in a jar and you'll see how interest helps your money grow.

3. One-time investments work

Account balance = $4,535; interest earned = $895Roll your mouse over the bags of money.

Let's say you receive $3,640 at your graduation party. You put it in a credit union savings account.

This is called a lump-sum investment. Assume the interest rates stay fixed at 2.2%.

Roll your mouse over the image on the right to reveal the total amount of money you'll have in your account at the end of 10 years.

Keep reading to learn what causes such a difference in earnings...

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