Compound Interest

By now, you may have noticed that many of my previous posts are gone. This is because I received some feedback that previous posts were too complex. Today’s post, like other posts made this month, attempt to explain more basic concepts. Today’s subject is compound interest. 

Compound interest is amazing. Why? Because the rate of growth is ever increasing. It’s the equivalent of a snowball rolling down a hill – its gets bigger and bigger and bigger.

With compound interest, your investment will grow at an exponential rate. Since compound interest grows on top of previous growth, time is the friend of compound interest. With compound interest, a little extra time is reward with substantially more return. The more time, the greater the growth.

Consider a hypothetical example. With compound interest, one dollars invested at a 20% interest rate will grow to $5 in 10 years. That’s amazing. But if you give that $1 another 10 years, you’ll have $32. That’s incredible. If you add another 10 years, that $1 is now worth $198. Wow! Just ten more years will produce a return of $1,225. That's outrageous.



Look at the chart below to see just how much more value time can add exponentially.

a

a

How does this happen? Compound interest works because the principal (the $1 invested) not only produces interest, but the total of all interest produced also produces more interest. So, while in the first year you have $1 working for you, you have $5 working for you after 10 years. By getting your money to work for you, the effect is exponential.

In short, save as much money as you possibly can and invest it today!