Compound Interest – The eighth wonder of the world
July 14, 2023
What makes compound interest so powerful?
The fabulous quality of compound interest is it causes your wealth to grow faster. It makes a given sum of money grow at a faster rate than simple interest because you earn returns on the money you invest, as well as on returns at the end of every compounding period. This means that you don’t have to put away as much money to reach your goals!
Can compound interest make you rich?
Each year, your investment grows exponentially because, as previously mentioned, you’re earning interest not only on your original investment. You’re also earning interest from previous years. This can quickly add up. And over time, it’s how compound interest can make you rich.
Einstein believed compound interest was the eighth wonder of the world and said – “He who understands it, earns it; he who doesn’t, pays it,”
Albert Einstein also reportedly said. The beauty of compound interest is that it allows you to earn interest on your interest – so that while you have to sweat to earn the money you initially invest, from then on, your money works on your behalf.
Start Saving Early
Young people often neglect to save for retirement. For people in their 20s, the future seems so far ahead that other expenses feel more urgent. Yet these are the years when compound interest is a game-changer: Saving small amounts can pay off massively down the road—far more than saving higher amounts later on in life.
Here’s one example of its effect.
Let’s say you start investing in the market at £100 a month while still in your 20s. Then let’s assume that you average a positive return of 1% a month (12% annually), compounded monthly across 40 years. Now let’s imagine that your twin, who is the same age, doesn’t begin investing until 30 years later. Your tardy sibling invests £1,000 a month for 10 years, averaging the same positive return.
When you hit your 40-year savings mark—and your twin has saved for 10 years—your twin will have generated about £230,000 in savings, while you will have amassed over £1.17 million. Even though your twin was investing 10 times as much as you (and even more toward the end), the miracle of compound interest makes your portfolio significantly bigger, here by a factor of a more than five.
So, as you can see from the example, compound interest is a wonderful phenomenon and the sooner you embrace it the better your financial wellbeing can be.
To find out how you can put the power of compound interest to work for you contact me now at email@example.com with your contact information and ‘Compound Interest’ in the subject line