Power of Compound Interest

Always start small, everything starts with a small step!! Start with what you have, and it will be multiple with the power of compound interest.

“The most powerful force in the universe is compound interest”~ Albert Einstein

What is compound interest? Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. For example, if you saved $10,000 in fixed deposit with interest rate of 3%. If you don’t take the money out in 10 years, assuming the interest rate remains the same, the money will grow to $13,439. The $3,439 is resulted as compounding interest.

Let take Daryl and Mark as an example. Daryl starts keeping aside $2,000 yearly at the rate of 3% per annum. He starts early at the age of 20. Mark starts a bit later  4 years late. Let see the difference in their saving after 10 years.

Age Darly Mark
20 $2,000 $ –
21 $4,060 $ –
22 $6,182 $ –
23 $8,367 $ –
24 $10,618 $2,000
25 $12,937 $4,060
26 $15,325 $6,182
27 $17,785 $8,367
28 $20,318 $10,618
29 $22,928 $12,937

4 years late in saving caused Mark $10K differences between Mark and Daryl. The cost of waiting 4 years is $10K for Mark. At the age 29, Daryl is $10K richer than Mark. The higher the interest (>3% per annum) and the capital (saved >$2,000 per year), the bigger the gap!

Remember the piggy bank? Remember those times when you saved pennies into the piggy bank? Yes, today, you can start small. The earlier you start saving, the greater the accumulated interest on your investment.

The best way to ensure your future financial success is to start saving today.

Books like The Millionaire Next Door make it clear that earning a high income that guarantees to wealth but the ability to save. Those who become wealthy do so by spending less than they earn.

To make compounding work for you:
1. Start early.
2. Make regular investments.
3. Be patient. Do not touch the money.

Compounding creates a snowball of money. At first your returns may seem small, but if you are patient, they will grow enormous.

Leave a Reply

Your email address will not be published. Required fields are marked *