Compound interest, what is it? Lets first look at one of the sayings that some one pretty famous once said!
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.Compound interest is the most powerful force in the universe.
I was at a seminar and they mentioned compound interest. I really had no idea what it was until they explained it and I realised that I do know what it is, I just never ever realised it had a name!
So what is compound interest?
This is simply the interest applied on your original amount, but as that grows interest the actual amount grows, meaning your interest grows. In other words it grows at a faster and faster rate!
Pretty exciting right? Well maybe not yet but I am pretty sure it will be when I explain a bit further.
Lets take 2 examples. The first one is you leave your money in a bank with a 5% interest the second is more ambitious! (figures in the first graph are approximate and assume 5% paid at day 365). We also assume a 1000$ starting figure…
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It would look something like this…So basically, after 24 years we can turn our 1000$ into 3225$ just by leaving it in a bank that pays 5% interest (none I know of in my country pay this by the way!)
Now lets look at a more aggressive type of compounding. Lets say you found a business that paid you back 40% return in around 4 months.
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So in just under 7 years your 1000$ will turn into $627,511! Now to see the true power of compounding lets see what these figures look like if we add another 1 year!
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If we left it in for 1 more year at these rates, then we would be at 1,721,892$ yup not to far off 2 million!
The power of compounding basically says find a good enough interest rate, that pays often enough over a period of time and watch your money grow exponentially!