THE MOST POWERFUL FORCE
ON EARTH… IS IT WORKING
FOR YOU?
Albert Einstein was once asked what he considered to be the greatest force in the universe. Knowing a thing or two about numbers, Einstein replied that Compound Interest was not only man's greatest invention, but it was also the most powerful force on Earth! Those are compelling words coming from one of the most intelligent men of our times!
Many people feel that compounding interest is just a bunch of complicated financial mumbo-jumbo, but in reality, it is a simple concept that can pay off very big. In fact, it's one of the few ways you can ever get your money to work harder than you do.The principle of compounding interest applies to any kind of return, or money earned by an investment, such as dividends paid by a mutual fund. Consider this example:
Starting at 20-years old, you invest $50 per month for 45-years at 10% interest… You'll end up with $454,367 -- and you only paid $27,000 out of your own pocket!Compounding refers to the growth of an investment from reinvesting any money that is earned. That way, your investment earns a return based on the money you put in, AND on any returns already earned on that money. In other words, you get paid interest on the interest! Of course, depending on the investment vehicle you choose, your principal is not guaranteed, and the value may go up or down.
To give another example, let's say you put $1,000 in an investment that is earning 10% a year. You will earn $100 the first year, bringing your account to $1,100. If you reinvest the interest, you will have $1,100 invested the second year, and interest will be paid on the $1,100, rather than just the original $1,000. So now, the interest you earn the second year will be $110 instead of $100 (10% of $1,100 is $110), and your total investment at the end of the second year would be $1,210. This continues throughout the life of your investment, and believe me, it adds up FAST!If you choose not to reinvest your earnings, you earn what is called "simple interest". That means that you are paid a return only on the amount of your initial investment. If you earn simple interest of 10% a year, it will take 10 years for your investment to double. However, with the same interest rate compounded, your investment will double in 7.2 years! Quite a difference! Use the Rule of 72 to figure out how quickly your investment will double:
The Rule of 72 -- Simply divide the number 72 by the rate of return you are currently earning. The answer is the number of years it will take your investment to double in value. For example, if your investment is earning an 8% return, it will double in 9 years (72 divided by 8 = 9). Remember, the Rule of 72 only works with compounding interest and only when you don't dip into the funds in your account. [continue…]
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