Magic of Compounding Interest

Have you ever wondered how Money can sometimes vanish from our hands like magic? It is usually through the process of spending it in some way or another. Doesn’t matter if it’s from spending on consumer goods, Bills, services, expenses and the many other ways money can part from us. The important thing to realize is that once that money is spent, you will possibly never see that same exact money again. If your goal is to one day become financially free and wealthy, you must work on saving a significant of your disposable income. After all, it’s not what you make in terms of money that matters, but really what you are able to keep.

Enter Compound Interest
Now that we have a good primer on the importance of saving, you want to apply the highest amount of possible compounding interest to a significant amount of your savings. If you aren’t familiar with compound interest, it is the amount of interest that your money can accrue through some investment vehicle that actually allows that interest to compound (grow exponentially) over time. Time and re-investing into your investment will allow the magic of compounding interest to really grow over time. Just how ‘magical’ can compounding interest really be? Well, to make sense of it all, we can look at putting a very modest investment sum of say $5,000.00 into some compounding interest investment. See example below.

Compound Interest in Action
It is worth noting that Compound interest not only applies more money, growth interest to the principal, but also on the interest. This allows your money to grow even more exponentially. To see the magic of compounding interest in action, let’s assume that we have a modest 5,000.00 to invest (if you don’t have this amount, you need to really work on your saving). Let’s for the sake of our example, say your investment pays interest of 10% per annum. Let’s also say that we put our 5,000.00 investment into this investment vehicle that earns 10% Per annum. If we did nothing but leave that 5,000.00 in there and assume we are 20 years old and leaving that money till retirement age at 65, in 45 years our investment of only 5,000.00 that paid us 10% compounding interest per year would be worth around a whopping $365,000! For an even more dramatic illustration, let’s assume that we are a savvy investor and re-invest $5,000.00 per annum in our 10% per annum, investment vehicle. Our investment after 45 years would be almost a staggering $4,000,000.00 (Four Million dollars)! See the difference?

Use the value of Time
To see the greatest result of your investment, you need to get started with your saving into a compounding interest vehicle as soon as possible. The longer you wait, the more your investment will actually lose. If you wait say two years to get started, this can cost you hundreds to thousands of dollars in lost compounding interest. So, procrastinate no more and get started as soon as possible. Don’t be a statistic that comes down to retirement age or even sooner without any golden nest egg put away for your future.

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Category: Financial freedom, Financially Elite Blog, Income

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  • Reinvesting dividends is very similar to compounding interest. And the best way to do that is to invest in an index fund with a decent dividend yield. Even for those who are leery of investing in the stock market, index funds are great way to build wealth over the long term.

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