Few people get rich from their wages alone; time is money. But you can take advantage of the “effect” of compound interest. Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding. Therefore the most effective is when you let the interest or earnings on an investment build up instead of spending it.
Starting investment
$100,000
End year 7
$200,000
End year 14
$400,000
End year 21
$800,000
End year 28
$1,600,000
End year 35
$3,200,000
Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding). The dramatic effect of compound interest can be illustrated if you imagine you have an investment that starts off at $100,000 but grows by 10% per annum. By using the “Rule of 72*”, you can see that the amount would double in value every seven years.
“Time is money”- a phrase coined by Benjamin Franklin is the very heart of wealth-building program. If you are investing with time on your side, then compounding is a powerful tool for creating long-term wealth. By earning returns on your returns, you can build a surprisingly large portfolio with only a small regular contribution.
Over time, regular savings of quite small amounts can build to an astonishing sum of money. Here is a chart that illustrates based on your current age and a 6% return rate — how much you need to be saving per month in order to reach $1 million by age 65.
Time and patience are the friends of compounding and, therefore, of investing. The longer your money can work for you, the better compounding works. To know more on how a regular investment plan can help you benefit from the power of compounding, contact Dino Zavagno’s team of consultants at Gladstone Morgan info@gladstonemorgan.com
* “Rule of 72” helps you calculate the number of years it will take for your investment to double by dividing 72 by the percentage rate of growth. It is a very simple but yet an easy way to do compound interest calculations in your head.
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