When asked what the greatest discovery of the 20th century was, Albert Einstein replied compound interest. In fact he has called it “the most powerful force in the Universe”. So what is this phenomenon called compound interest you ask? It’s the concept that money grows exponentially. Oh, ok you want the English version. In essence compound interest is interest collected on your original investment plus the interest that investment has earned. So whenever interest is applied it gets added to your principal balance and interest is accumulated on the whole balance, not just your original investment. Basically a snowball of wealth accumulation.
Lets look at retirement planning. Fresh out of college, Susie, at age 22 invests $200 a month for 10 years earning 10% interest. After those 10 years however, she doesn’t contribute another dime to her retirement. So Susie has invested $24,000 of her own money. Her counterpart Mark was not so quick to start saving for retirement and waited until he was 32 to start investing (the age she stopped). He also invested $200 a month earning 10%, but instead of stopping after 10 years, he invested all the way until he retired at 65. His out of pocket investment was $79,200, over three times more than what Susie invested. So who has more money at retirement? Susie does. Not just a few dollars more, but hundreds of thousands more. At 65, Mark’s $79,200 investment has earned him $586,744. Susie, after only $24,000 out of her pocket, has over $977,000 saved. How can this be? Susie had time on her side allowing her interest to exponentially gain more interest. Lesson learned: invest early, invest regularly, and invest for the long term. Let your money do the work for you, it’s a wealth building secret you can’t afford to not use.
(photo by purpleslog)