Wealth Management

More Interest-ing

The impact of compounding plus growth

More Interest-ing

Anyone who has ever owned a CD, savings or money market account is familiar with the fundamental concept of earning interest. What many people fail to fully comprehend, however, is the distinction between “simple interest” and “compound interest,” and more importantly the profound difference the latter can have on your ability to accumulate more wealth.

With simple interest, how much you will ultimately earn on your money is a straightforward calculation that’s solely dependent on three variables: the amount you invest; the interest rate you’ll receive; and the length of time you invest your money for.

For example, a $100,000 investment in a 10-year bond paying a simple 5% annual interest rate would earn you $5,000 in interest each year, or $50,000 in total accumulated interest upon maturity ([$100,000 x .05] x 10). At the end of the ten years, your original investment would therefore be worth $150,000.

Conversely, the same $100,000 investment in a 10-year investment paying 5% interest compounded annually would not only earn interest on the principal amount invested, but also earn interest on the interest paid in previous years as well. This enables your money to grow considerably faster. Rather than being worth $150,000, the same investment earning compound interest would have grown to almost $163,000.

Much like a snowball increasing in size and speed, the more time the power of compounding has to work, the more dramatic its effect. Using the same example as above, after 20 years the simple interest account would have doubled to a value of $200,000 whereas the account with compounding would be valued at $265,330 (nearly one-third more). In 40 years, the simple interest account would be worth $400,000 while the compound interest account would be worth over $700,000. When it comes to the power of compounding, time really IS money!

Adding investment growth to the equation

Now, rather than a principal amount that never changes, imagine you apply the same power of compounding to a portfolio of investments that could also be growing in value at a competitive market rate. What results is the financial equivalent of supercharging an engine.

For the 20-year period from December 1996 until December 2016, the S&P 500® (with dividends reinvested) increased by an average of 7.6% annually. Keep in mind that this timeframe includes the devastating impact of the 2008 financial crisis in which the index lost more than 36% of its value. Yet a $100,000 investment that earned a market return and had dividends reinvested would have grown in value to $435,376 thanks to the incredible power of compound growth.1

With compounding, you receive interest not only on your original investment, but also on all interest, dividends and capital gains that accumulate. As the years go by, your money can grow faster and faster, especially in retirement accounts where growth is either tax-deferred as in traditional IRAs and employer-sponsored plans or tax-free as in Roth IRAs because Roths are funded with post-tax dollars.2 In all cases you need is enough time, a commitment to reinvest any account earnings (or even better, to periodically add to your original investment), and a fair amount of patience. This example is for illustration purposes only as past performance is no guarantee of future results.

Whether you’re putting money away for retirement, a child’s education or another long-term goal, talk to your SunTrust advisor about how the power of compounding can turn even a modest monthly savings into a sizable nest egg over time.

For more on retirement and investing planning:

Call our Client Advisory Center at 844.206.8900 or learn more online.

Note: Center hours are 8-6 ET, Monday through Friday

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.


Investment and Insurance Products:

Are Not FDIC or any other Government Agency Insured   Are Not Bank Guaranteed  May Lose Value 

© 2018 SunTrust Banks, Inc

equal housing logoSunTrust Bank is an Equal Housing Lender. Member FDIC

equal housing logoEqual Housing Lender. SunTrust Mortgage, Inc

SunTrust, SunTrust Mortgage, SunTrust PortfolioView, SunTrust Robinson Humphrey, SunTrust Premier Program, AMC Pinnacle, AMC Premier, Access 3, Signature Advantage Brokerage, Custom Choice Loan and SunTrust SummitView are federally registered service marks of SunTrust Banks, Inc. All other trademarks are the property of their respective owners.

Services provided by the following affiliates of SunTrust Banks, Inc.: Banking products and services are provided by SunTrust Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank, SunTrust Delaware Trust Company and SunTrust Banks Trust Company (Cayman) Limited. Securities, brokerage accounts and insurance (including annuities) are offered by SunTrust Investment Services, Inc., a SEC registered broker-dealer, member FINRA, SIPC, and a licensed insurance agency. Investment advisory services are offered by SunTrust Advisory Services, Inc., a SEC registered adviser. GFO Advisory Services, LLC is a SEC registered investment adviser that provides investment advisory services to a group of private investment funds and other non-investment advisory services to affiliates. Mortgage products and services are provided by SunTrust Mortgage, Inc.

SunTrust Mortgage, Inc. - NMLS #2915, 901 Semmes Avenue, Richmond, VA 23224, 1-800-634-7928. CA: licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, IL: Illinois Residential Mortgage Licensee #MB-989, Department of Financial and Professional Regulation, 100 W. Randolph, Suite 900, Chicago, IL 60601, 1-888-473-4858, MA: Mortgage Lender license #-ML-2915, NJ: Mortgage Banker License - New Jersey Department of Banking and Insurance, NY: Licensed Mortgage Banker—NYS Department of Financial Services, and RI: Rhode Island Licensed Lender.

"SunTrust Advisors" may be officers and/or associated persons of the following affiliates of SunTrust Banks, Inc.: SunTrust Bank, our commercial bank, which provides banking, trust and asset management services; SunTrust Investment Services, Inc., a registered broker-dealer, which is a member of FINRA and SIPC, and a licensed insurance agency, and which provides securities, annuities and life insurance products; SunTrust Advisory Services, Inc., a SEC registered investment adviser which provides Investment Advisory services.

SunTrust Private Wealth Management, International Wealth Management, Business Owner Specialty Group, Sports and Entertainment Group, and Legal and Medical Specialty Groups and GenSpring are marketing names used by SunTrust Bank, SunTrust Banks Trust Company (Cayman) Limited, SunTrust Delaware Trust Company, SunTrust Investment Services, Inc., and SunTrust Advisory Services, Inc.

SunTrust Bank and its affiliates do not accept fiduciary responsibility for all banking and investment account types offered. Please consult with your SunTrust representative to determine whether SunTrust and its affiliates have agreed to accept fiduciary responsibility for your account(s) and if you have completed the documentation necessary to establish a fiduciary relationship with SunTrust Bank or an affiliate. Additional information regarding account types and important disclosures may be found at www.suntrust.com/investmentinfo.

SunTrust Robinson Humphrey is the trade name for the corporate and investment banking services of SunTrust Banks, Inc. and its subsidiaries, including SunTrust Robinson Humphrey, Inc., member FINRA and SIPC.