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Albert Einstein, the famous scientist once said that “the most powerful force in the universe is compound interest.”
It is surprising therefore that the miracle of compound interest gets overlooked in financial planning.
What is Compound Interest?
The word interest brings to mind debt for most people. However, interest doesn’t only come into play on money you borrow, it could work in your favour when you save or invest money as well.
One doesn’t need the I.Q. levels of Einstein to understand compound interest, it is quite a simple concept. Compound interest is the interest calculated on the first deposit and also on accumulated interest from previous periods on the same initial deposit. Put simply, it is earning interest on your interest. Interested yet?
It is pretty much like a snowballing effect, and your interest grows in leaps and bounds as a result. Unlike simple interest, where interest is only calculated on the initial amount, compound interest will make an initial deposit to grow faster.
Putting your Money to Work for You
A lot of focus should therefore be placed on compound interest as a useful tool in financial planning.
Wealth can grow exponentially with the efficient use of this much underused tool.
Using compound interest is really just putting your money to work for you, the returns at the end are well worth it.
Take Advantage of Compound Interest Right Now
The secret ingredient responsible for the effectiveness of compound interest is TIME.
It is a fact that how much you save is less important than when you actually begin to save when it comes to compound interest. When you leave an investment untouched over a period of time, say ten to fifteen years, the value of such an investment can add up immensely even if that is all you ever invest.
Reasons to include Compound Interest in Financial Planning:
- It adds up faster than you think.
- Compound interest is a double-edged sword. It works for saving and against borrowing.
- Time is on your side. The longer money compounds, the faster it grows.
- Compound interest requires you to make sacrifice now in order to reap a benefit in the future. You will probably have to work harder by taking up an extra job or applying for loans to make up for the gap created by investing now, but be certain that the reward will be more than the sacrifice.
- You don’t have to be the Queen of England to make compound interest work for you. The principle of compound interest works the same way whether you invest $60 or £60 million.
Are you making use of compound interest in your financial planning? Let us know in the comments.