Compound Interest and Investments
Most of us are lazy when it comes to investments! Generally the first thought that comes to mind when it comes to investing is “well I just don’t have the extra or money right now”. This may be true from a particular point of view, just as it’s true that a day has 24 hours in it, and in those 24 hour days; some people manage to change the world while others are constantly trying to catch up on their daily schedules. The point here is nobody has extra money, we have to free up that extra money just like we need to make time to fit things in.
Power of investments:
The power of investments for salaried people cannot be underestimated or undermined. While you’re working to make money your money is also working to make more money. In particular what I’d like to discuss is “compound interest”.
Compound interest is something most of us learned about as a part of mathematics in school, and while we were compelled to study it at the time (which most of us hated), a lot of us also felt compelled to forget about it as soon as possible!
Principals of compound interest:
The principles of compound interest are extremely powerful. Let’s have a closer look at how your money can grow and multiply. Now, just to demonstrate my point I’ll give you a fascinating example; if you take 1¢ and double that every day, how much money do you think that would be worth at the end of 31 days? This is $1,000,000 question!
The answer is this, by the 10th day you would have $5.12 and this is by no means a fortune, not even a small one! At the end of the 20th day if you double that $5.12 every day, it magically transforms into $5242.88, so this compound interest really makes some sense. Now at the end of the 31st day that reaches the amazing figure of $10,737,418.24 just to put that large number in words its “ten million, seven hundred and thirty seven thousand, four hundred and eighteen and twenty four cents”. You may be wondering if this figures the correct amount, well believe it, that’s the power of compound interest.
Compound interest and investments:
Now when you invest your money over a period of time, not necessarily 31 days a similar thing happens with your investment. Over a course of 10 years money that is invested and reinvested can grow and multiply many fold till it reaches a significant amount. For the magic of compound interest to work what’s required is time and an initial investment. If you’re thinking of investing a small amount of money tomorrow make sure that you actually make that investment if you want to see your money grow. Typically most investments pay you between 8% to 10% a year, this may not seem to be a significant amount of returns but just as in the example above in time it can grow into a huge amount.
Albert Einstein was famously quoted of having said “compound interest is the eighth wonder of the world”, unless a person is smarter than Albert Einstein it would be difficult to argue the theory!
About Author: Rakes is the author of this article and a successful financial advisor with 5 years of experience visit Discovery Credit Union .
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Category: Saving Money
