You probably find it nothing interesting or even boring, but please read on because compound interest is the fundamental on which our future wealth is built. Briefly, compounding occurs when the earnings on savings or investments are added back to the principal, or reinvested, which in turn generates additional earnings which are again invested, and so forth. This is such a basic process that it’s hard to see where the excitement is. And yet, compound interest can get the blood pumping when you realize the potential in smart investing.
With reference the chart above, consider starting at the age of 21 by saving $2,000 per year each year. Through sound investment, you get a reasonable 8% interest on the principal. At age 30, you decide to stop and you leave your money growing at 8% until you retire at age 65. A hefty sum of $462,648 is compounded based on the total saving of $20,000 over the ten years spread!
Now assume you decided only to start saving at 30, and you have decide to diligently save $2,500 every year until 65, again investing at 8%. Of course you reckon that having saved so much harder for so much longer, 35 years rather than just 10 years, you will have more than made up for lost time when you were young.
Well, the 10 year plan, in which you invested $20,000, will reap $462,648! The 35 year plan, in which you have invested $87,500 shall reap $465,255, which about the same as the previous saving plan, but had to save $67,500 more.
The power of starting young is clearly shown in the chart above. Fortunately, most of my clients are aware how the effect of compounding interest coupled with starting to save early has makes their wealth grows over the years. Setting aside a portion of their monthly salary and allocating funds for wealth accumulation. Certainly they have make an informed decision to take on a prudent investment path to build their future wealth. They will certainly reap what they have sow. Then the question is have you started your prudent "compounding-interest" plan?
The best time to invest is now!
Leverage on the concept of compound interest to boost the value of your investment. Work hard to improve the percentage return and stick with it. Not letting compound interest reward you later years is such a waste of all the effort put in the first few years when nothing much seems to be happening.
So be smart to start early.
Be mindful. It is not what you earn, it is what you do with what you earn!