You might be wondering just where you can reap these benefits. Let's take a look at some of the places where compound interest can work for you.
1. Bank Accounts
Bank accounts are one of the most well-known vehicles for gaining compound interest.
Most savings accounts try to attract savings by offering interest that's higher than the interest for a checking account. In fact, a lot of checking accounts don't pay any interest.
Compound interest also gets earned on money in certificates of deposit (CDs) and money market accounts.
A lot of bonds just pay fixed interest amounts. However, a few types, such as zero coupon bonds, use compounded growth.
With a normal bond, you'll pay the bond's face value, and collect the simple interest payments. Then when the bond reaches maturity, you get the face value of the bond back.
However, a zero coupon bond lets you pay less than the face value initially, then collect the full face value at maturity, with no interest payments in between.
The difference in the amount you pay and the face value you get back is made up with compound interest.
3. Other Types of Compounding
Compounding can even apply to accounts that don't earn any interest at all.
For example, if you have stocks that pay dividends, you can reinvest those dividend payments by using them to buy more shares of stock. Then those shares also grow in value and eventually give back their own dividend payments.
This causes your portfolio to grow even faster, thanks to a type of compounding. You should aim to have compounded growth in your portfolios since this is a great way to maximize your investment.