The most powerful force on earth; compound interest.
Most great fortunes are built slowly. They are based on the principle of compound interest, what Albert Einstein called, “The greatest power in the universe” -Brian Tracy
Simple interest is interest that is always applied to the initial capital because the interest generated is not capitalized. In other words, the earnings from the interest on the initial capital are never reinvested.
The notion of compound interest refers to the return (or cost) on the initial capital at an interest rate over a certain period of time, where the interest earned at the end of each period is not withdrawn, but added to the initial. The interest is therefore reinvested.
According to many financiers and economists, compound interest is the ideal tool to make you a millionaire. However, if you are someone who wants to make a lot of money quickly, easily, and safely using compound interest, you are probably not in the right place and this article will do you very little good. Here we are going to learn how compound interest can become a money-making machine if used by the right person, and that person might be you.
As Brian Tracy said, many of the great fortunes have been created slowly, usually through long-term investments, over periods of time of more than thirty years. A great example of this type of fortunes is probably Warren Buffet. However, let me tell you that all or the vast majority of these investments have made use of compound interest to make them grow, rarely will such amounts of money be amassed through simple interest investments.
To better illustrate this fact, let's look at a graph showing the performance of an initial investment of 20,000 dollars over thirty-five years to which we add 250 dollars a month and obtain a compound interest of 8%. In this way, the magnificent effect of this interest rate can be better appreciated.
As the graph shows, the growth of our investment is exponential, as time goes by, the money grows more and more. For the first 10 years, we don't make a huge profit, but as time goes on we make more and more. In fact, our initial investment of 20,000 dollars plus the 250 dollars a month that we add ends up becoming more than 800,000 dollars, if we continue investing for 5 more years we would reach a million, but we are not very interested in being millionaires at 70 years of age, are we?
Now we are going to analyze the same investment using simple interest. As the name suggests, the investment is simple, if we were to invest 20,000 dollars at a simple interest rate of 8%, we would obtain 1,600 dollars a year, which would add up to a total of 56,000 dollars over 35 years.
Compound interest could be called the eighth wonder of the world. However, it takes a lot of patience and long-term vision to get the target benefit. There are many people who are unwilling to invest their money for 30 or 35 years because they consider it counterproductive and prefer to spend their money during their youth, which is perfectly reasonable. However, if you are a young person who is willing to save a good amount of money, invest a small part of your monthly earnings and wait, compound interest is the right way to get rich. It is true that if you start investing at the age of 25, it is very likely that by the time you are 50 you will have built up quite a substantial fortune, and you will still have a long way to go. Also, think of all the things you could offer your children in terms of education, quality of life, travel...
Just remember, time is on your side, start saving, learn to invest and be smart, don't be fooled by quick, safe, and very profitable investments. Make use of compound interest, it can change your life.