“Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest.” Compound interest has been identified as Einstein’s eight wonder of the world. The longer you allow compound interest to work for you the greater it’ll pay in the end.
Example
If I were to ask you if you would rather have one million dollars or a penny that doubles every day for thirty days which would you choose? If you hadn’t heard this before you might say it’s foolish not to take the one million dollars. However, if you understand how compound interest works this example can work in your favor. You see, a penny that doubles for thirty days begins with a slow start. On day two you would have 2 pennies, on day five you would have 16 cents, and on day ten you would have accumulated a little over 5 dollars. With only twenty days left to double your money it doesn’t seem like you’ll ever get anywhere near matching the one million dollars. If you trust the process compound interest will begin to work its magic. On day fifteen you’d make a significant jump to $163.84, on day twenty that number grows to $5,242.88, and on day twenty-five your doubled penny would grow to $167,772.16. In this example, you can begin to see how compound interest works, but you might be looking at these numbers thinking the one million dollars is still greater than the amount accumulated by day twenty-five. The doubled penny doesn’t become greater than the one million dollars until day twenty-eight where it reaches $1,342,177.28 and by day thirty it becomes more than five times more the initial one million dollars for a total of $5,368,709.12.
Summary
Just as in the example above compound interest works with investing the same way. When you first get started it seems like there is no movement at all and you may even begin to ask yourself why you even started investing in the first place; however, if you stay the course and trust the process compound interest will work wonders for you over time.
Investing Simple 