What Are the Risks of Compound Interest?

When assisting clients with the key elements of compound interest, a financial planner should be able to successfully educate their clients on the risks and benefits that come along with compound interest. While compound interest has a wide variety of benefits, clients need to be aware of the risks before they make any big decisions. 

Compound interest is interest being paid by a financial planner on an account’s principal amount along with the interest that has been accumulated by the funds in the account. In short, compound interest is a type of interest that an account holder earns from interest.

Unfortunately, there are a few risks that clients should be made aware of before they decide on any compound interest agreements, the potential of accumulating large amounts of debt is just one risk. Compound interest has the potential of accumulating debt because its cost is not always immediately made apparent to the account holder. If an account holder does not monitor their compound interest and decides to make interest payments, those payments can result in lost funds. 

The interest rate of compound interest is a large deciding factor on the overall success an account will bring the account holder. This is why it is essential for financial planners to adequately educate and assist their clients throughout the compound interest agreement, set-up, and maintenance processes. 

If an individual is interested in learning more about the various types of compound interest and how to achieve the best results, it is highly recommended to reach out to their current financial planner to inquire about their offerings and requirements.