The Magic of Compound Interest

Albert Einstein, the scientist of Relativity fame, is rumored to have said "The most powerful force in the universe is compound interest." Not a bad endorsement from a man who believed that time could turn on itself in certain conditions! I don't know if he really said it, but I hope so. And I know that compound interest is an amazing phenomenon.

Compound interest is the alternative to simple interest. If you earn 5% simple interest on $100, at the end of one year, you have $105. You put the five dollars in your pocket, and at the end of year two, you have $105 again. On the other hand, if you earn compound interest, at the end of the first year, you again have $105, but this time, the entire $105 earns interest the second year, raising your amount of interest earned to $5.25, for a total of $110.25. The third year, you earn interest on that entire amount. The results of this compounding can be incredible.

For example, if you invested $46,030 at 8% compound interest for 40 years, at the end of that time, you would have $1,000,000! Of course, the problem with this equation is that you have to start with $46,000, and most 25 year olds can't do that. So let's use an easier (more realistic) example.

Let's assume you can save $50 a month for forty years and earn 8% compounding interest. At the end of the 40 years, you will have approximately $174,550! If you could save $100 a month for forty years, the final balance grows to almost $350,000! That's impressive.

Don't get discouraged if you haven't been saving as much as you need--start today, and you will be excited with the results.

Be prosperous!
Peggy