Determine Your Effective Annual Yield - Compound Frequency Makes A Difference!

What is the effective annual yield on my investment?

The number of compounding periods per year will affect the total interest earned on an investment. For example, if an investment compounds daily it will earn more than the same investment with the same stated/nominal rate compounding monthly. Use this calculator to determine the effective annual yield on an investment.

Assumptions

This information may help you analyze your financial needs. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations do not infer that the company assumes any fiduciary duties. The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. Hypothetical illustrations may provide historical or current performance information. Past performance does not guarantee nor indicate future results.

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Additional Information

Investments Best Suited for Long-Term Investing

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Long-term investors seek to build portfolios that will gain maximum value over time. Certain kinds of investments are particularly well suited to helping investors take advantage of long-term growth trends.

Growth stocks are stocks from companies with a strong potential for future growth. The earnings of growth stocks are expected to grow faster than the market average. More volatile and with few dividends, the true potential of growth stocks lies in their future prices. They are well suited for the long-term investor willing to take a chance and hold on through short-term ups and downs. Growth mutual funds, which invest in a variety of growth stocks, are a slightly less volatile way to invest in growth stocks.

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What Investments Are Suited For Short-Term Investing?

Depending on your tolerance for risk, there are many types of investments at your disposal for the short term. If you don't have a high tolerance for risk, you might want to consider a money market fund. A money market fund is one that invests in low-risk government securities such as Treasury bills and commercial short-term loans. Unlike other bank or credit union investments such as certificates of deposit, money market funds are not federally insured and can change in price. These changes are usually minimal, however. Money market funds are highly liquid (meaning they can be converted to cash).

For a short-term investment with very good liquidity, yet with higher returns than money markets, you can invest in short-term bonds. Short-term bonds tend to have regular interest payments, but their prices on the market can fall when interest rates rise.

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Make Compounding Work For You

Taking advantage of compound interest need not be a passive strategy on your part. The bigger your investment base, the more that time and math will conspire to build up your wealth. That is why investment advisors suggest taking advantage of time and a schedule of periodic investing. The results build on themselves.

You can maximize the power of compounding by following a few easy strategies:

  • Invest early. The longer your money has time to work for you, the better compounding works. In fact, the effect is far more dramatic the earlier you begin and the longer you stay invested. So, the sooner you can begin investing, the more interest or dividends, and hence growth of your principal, you will accumulate through compounding.
  • Invest often. Adding to your investments on a regular basis such as monthly or weekly can build your wealth quickly. The accumulation builds the base on which your interest is calculated. To stay on a schedule for periodic investing, some people take part in automatic investment plans, in which money is taken out of their deposit accounts and put into their chosen investments.
  • Reinvest your dividends. If you own shares in a stock or mutual fund, you may be able to reinvest your dividends into more shares. This continues to build your investment base, allowing you to compound your return. It's putting your new income to work for you.
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