The Magic of Compound Interest

Let’s reminisce to middle school science… exponential growth. If it takes 8 days for a water lily that double every minute to cover half a pond when will the pond be completely covered? Trick question – it will be 8 days + 1 minute. Compound interest may not double every minute but the growth will still surprise you!

Putting today’s savings in an interest earning account rewards your responsibility with more money added to your savings. When you save and invest money early you start making money on your money. Then make money on the money your money made. Need I continue? You get the idea.

In this case a picture really is worth a thousand words. Say you are a 30 year old and hopping to retire early at 60. With 30 years to save and invest here is the difference compound interest can make:

Two graphs

Ongoing Savings

 

One time savings continue to grow

Three things to do right now

  1. Pick a secure investment vehicle (high interest savings account, government bonds, blue chip bonds)
  2. Put your savings in said account
  3. Watch your savings grow exponentially

 

Need exponentially more reason to invest?

That is making your money work for you – not just you working for your money. Say you can earn 5% in a savings account. You put in $1,000 and make $50 of interest the first year and you end up with $1,050 in your account. The second year you make 5% on all $1,050. This means interest of $52.5 and a total of $1,000. And it goes on.

 

Compounding interest is like a rolling snowball, the interest grains interest. As a result you watch your savings grow. Over the short-term a few percent is easy to overlook. Maybe even small enough to say it isn’t worth your while. If you only have $1000 – does it even make a difference? But that is short term thinking – the graphs show how different the two outcomes are.

Save Smartly,
Laura

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