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Exploring Financial Products and Strategies Promoted by Institutions: Compound Interest

June 21, 2023

When it comes to managing our finances and planning for the future, it's essential to be aware of the various financial products and strategies often recommended to us by various financial institutions. These organizations often promote various options to help people meet their financial goals. Unfortunately, many of these products and strategies are in the financial institution's best interest, not the individual's.

Over the next few weeks, we will share common financial products and strategies that institutions commonly advocate for.  In this blog post, we will focus on compound interest.

What is Compound Interest?

Compound interest is a powerful concept that allows your savings to grow exponentially over time. Financial institutions often encourage individuals to take advantage of savings accounts, certificates of deposit (CDs), or investment accounts that offer compound interest.  

Compound interest has an evil cousin called compound tax. Many financial “experts” and institutions treat this like a miracle; however, once compounding becomes significant and the 1099 starts growing, you will most certainly end up paying more in taxes. 

So with that exponential growth comes exponential tax. In our opinion, there are four main goals of financial institutions. 

  1. Get your money
  2. Get it on a consistent basis
  3. Hang on to it for as long as possible (and use it 7 to 10 times).
  4. Give back as little as the market will bear.

Compounding may sound good, but it can be a very expensive proposition when considering taxes and lost opportunity cost on the tax paid. Compounding interest may be the right strategy for some, but only for some. 

Our team, J. Arthur Financial, can help you implement a plan that aligns with your financial objectives, utilizing strategies and products that work for you - in your best interest and your family's best interests.  Please contact us if you have questions about using compound interest or your retirement strategy in general.