COMPOUND INTEREST
Samuel Djanie
I Help Professionals And Their Families Build Wealth As The Banks And The Wealthy Do.
History’s most famous scientist; Albert Einstein said to have once described compound interest as the eighth wonder of the world. He added that, “He who understands it earns it; and he who doesn’t, pays it”. How profound!
Compounding works with time. The more time you have, the better compounding will work in your favor.
DIFFERENCE BETWEEN SIMPLE INTEREST AND COMPOUND INTEREST
SIMPLE INTEREST
You only earn the same amount of interest each year on the original principal balance.
For example, if you could set aside $10,000 for your newborn baby in an account that was crediting 7.2 percent simple interest, the account would credit $720 each year. When your child turned age 67, the account would have earned $720 a year for 67 years, bringing the total value to $58,240.
COMPOUND INTEREST
A strategy to use to illustrate compound interest is “the rule of 72”
“The rule of 72”
The rule of 72 tells us that at a given interest rate, if you divide that rate into 72, the result indicates how many years it will take to double your money when it is compounding.
For example if you earned 8% compound interest, your money would double every 9 years, (72/8=9).
By the same token, if you earned 10% compound interest, your money would double every 7.2 years (72/10=7.2).
So in the above example, $10,000 growing at 7.2 interest compounded annually would mean your account balance would double in value about every ten years(72/7.2=10 years). The same account with $10,000 growing at 7.2 percent interest compounding annually would blossom to $1,054,510 by the time your child turned 67.
Year 1…………………….$10,000
Year 10…………………….$20,000
Year 20……………………$40,000
Year 30…………………….$80,000
Year 40…………………… $160,000
Year 50……………………..$320,000
Year 60………………………$640,000
Year 70……………………....$1,280,000
Wow! That’s over 18 times the amount that the simple interest produced.
And the statement that a dollar doubling every period for 20 periods will grow more than 1 million dollars is a true statement.
ADVICE
My humble advice to you is to start saving right now. Because compound interest makes use of time to grow wealth, time is of the essence. The longer you leave your money to grow THEleveraging compound interest, the wealthier you become. It is therefore necessary to start saving right now, even starting with the small amount of money you have.