Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it”. While some people question whether the quote was in fact from Einstein, the power of compound interest is unquestionable.
Here’s an interesting example. If you were to be given a sum of money after 30 days, which option would you choose?
Most people would go for the $10 million option as it is hard to imagine that $1 doubling 30 times will become $1.07 billion! This is the power of compound interest - your principal would accumulate with interest earned during the investment period, yielding more returns. The longer the investment period, the more you will benefit from compound interest.
The above example of doubling a dollar a day may sound unrealistic. However, in the real world, many do expect to have their investment returns double within a short period of time But the fact remains, the higher the potential returns, the higher the risks. Simply put, the more returns you seek, the higher the chance of losing money.
By contrast, a stable investment with a lower return is less risky, and over time it can also yield good returns through compounding effect. You don’t need a huge investment capital – even if it’s only $2,000 or $3,000 a month, you can still accumulate a good sum of money through long-term investing with the power of compound interest. Let’s input your monthly saving amount to see the effect of compounding:
Having a longer investment horizon is important as the effect of compound interest may not be obvious in the short term, but will be realised over time. While young people may not have much money to invest with, time is on their side and they are in the best position to take advantage of compound interest to accumulate wealth.
About the Author
I am 47 years old and a trading manager. I am good at financial planning and keep track of the latest developments in financial products and services. Financial planning is a life-long project; the earlier you start financial planning, the sooner you can enjoy the benefits and achieve your financial goals.