The Power of Compound Interest

WHAT IS COMPOUND INTEREST?

When people think about interest, they often think about debt. But interest can work in your favor when you earn it on the money you have saved and invested.

Compound interest can be defined as interest calculated on the initial principal and also on the accumulated interest from previous periods. Think of it as the cycle of earning “interest on interest” that can make wealth build rapidly. Compound interest will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.

You are not only earning interest on your initial investment. You are also earning interest on top of interest. That is why your wealth can grow exponentially through compound interest, and why the benefits of compounding feel like putting your money to work for you.

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If you save $1,000 a year from age 25 to 34 in a retirement account earning 8% annual interest, and never invest another cent, your $10,000 investment would grow to $157,435 by age 65. But if you wait until age 35 to start saving and then invest $1,000 a year for the next 30 years (a total investment of $30,000), you would have only $122,346 at age 65. The recommendation is clear: start early so your money has enough time to compound.

Conclusion

The power of compound interest is substantial. There is no one on the Forbes 400 list who did not use this system to build the wealth that put them among the richest people in the world. The more you save and invest from those savings, the more money you accumulate.

The goal is to let money work for you and to live from the results of those investments. One important recommendation: do not invest in an industry or portfolio you do not understand. If you prefer not to keep your money in a savings account and want higher returns through riskier investments with better ROI (return on investment), make sure of three points:

• You are not investing an amount you cannot afford to lose
• You understand how the portfolio, the market, and the industry you are investing in actually work
• You have the emotional intelligence to handle the pressure of that kind of investment

Money is not the goal. Money is the tool to raise your standard of living, your peace of mind, security, and quality of life, and to create more projects and help others.