How Compound Interest Creates You Wealth.
And do not forget the Rule of 72
Want to start creating you wealth?Here is excellent advice on why you should START TODAY!
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who does’t … pays it.” Albert Einstein
And it is Warren Buffet, one of the world's greatest investors, who has used this "eighth wonder of the world" to create his fortune.
Surely you should use it too?
What is compound interest?
Compounding interest is really just simple mathematics. You invest money and get paid interest on that amount.That is Simple Interest.
That interest is then added to your amount (capital) and you then earn interest on that capital amount, plus the interest it earned.
That is Compound Interest - earning interest on interest.
Using the principle of Compound Interest, your investment grows way faster than with Simple Interest.
And just think of the power it has over a longer-term investment.
As your investment grows, so too does the effect of compound interest.
It's like a snowball rolling downhill, starting small, but as more snow is added, the bigger it gets.
And the bigger it gets, the more snow it gathers.
So even without you actually adding to your investment it grows faster and faster!
Why don't you have such an investment yet?
Here is an example:- Year One: Your initial deposit (principle) of R 1,000 earns 5% interest per year, or R 50, resulting in a balance of R 1,050 at the year end
- Year Two: Your R 1,050 earns 5% per year interest again, or R 52.50
Your balance now is R1,102.50. - Year Three:Your balance of R1,102.50 earns 5% interest per year, or R 55.125. Your balance grows to R 1 157,63 and so on ...
This presumes an interest rate that is compounded every year.
But most banks compound interest daily - so your investment grows even more quickly!
Again I ask you, why don't you have such an investment yet?
It is important to realise that compound interest can work against you as well!
When you borrow money (called using OPM - other peoples money) to buy things, it is the most expensive way of financing an asset.But it is worse if you do not pay all the interest you owe on the due date because, your next payment interest amount, is based on the amount you borrowed PLUS the interest you never paid back!
And that can multiply very, very quickly!
That's Compound Interest working against you!
Why starting now is best for you.
This example shows you why the the earlier you start, the more likely you are to achieve your goal!Jane and Sipho start working and earning an income.
Jane (age 24) decides to invest R 2,000 per year into a unit trust - one of the finest investment you can make - and keeps it going till she is 30 years of age.
That investment grows by 12% (after costs and taxes).
She then stops contributing, and leaves the investment as is, earning say, 12% each year until she is 65.
Sipho decides to enjoy life and invest later. He starts saving the same R 2,000 per year but he at age 30 - 6 years later than Jane.
The investment is identical to Jane's in returning 12% (after costs and taxes).
Then Sipho continues adding R 2,000 per year to his investment until the same age as Jane, 65.
Who do you think got more at age 65?
Jane invested R 2,000 X 6 years = R 12,000 and got R 959,791 age 65.
Sipho invested R 2,000 X 36 years = R72,000 and got R 1,085,197 age 65.
He saved that amount for 36 years - over Jane's 6 years.
They got very similar amounts back, BUT Sipho had to save 6 times as much as Jane!
Another way to look at it is that, the 6-years Sipho waited before starting to save, cost him R 60,000!
That R 60,000 difference is what Jane got from Compound Interest - even after she stopped adding to her investment!
Unbelievable, but true!
Be like Jane and start your investment today!
Use the power of Compound Interest as soon as you can.You cannot buy back lost time!
DO THIS NOW!
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Peter Pyburn - Authorised Financial Services Provider, fully licensed to render financial services since 1991. Death and Disability Planning; Retirement Planning; Investment Planning; Healthcare and Estate Planning. More...
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Last update: October 4, 2024