Have you ever been to any of the seven wonders of the world? They are so-called the wonders of the world because of their beauty and perfection. They were created by mankind in the past that are now revered in the modern world. In the world of investing, there is a principle that is dubbed as the 8th Wonder of the World. Albert Einstein called it “the most powerful force in the universe”, and that is compound interest. Anyone can use the power of compound interest to get rich.
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
– Albert Einstein
What is so nice about it is that anyone can use it to their advantage, regardless of age, gender, social status and educational background. It can create millionaires even for ordinary people.
What is Compound Interest?
Compound interest is the interest on loan or deposit. The interest is then added to the principal amount and accumulated through a period of time. Simply put, it is interest on interest.
To illustrate, for example you start saving $100 a month from the time you are 20 years old until you become 65 years old for your retirement fund. Let us say the fund gives 6% interest per annum compounded annually. By the time you retire at 65, you will have $475,471.46 in your account.
Compare the $475,471.46 with $66,000 which is the total amount you would have saved after 55 years of saving if you have decided to put your money under the mattress. That is the power of compound interest. Use it to your advantage, and it will work wonders for you. It is the key to wealth.
To take advantage of this principle, you need two things.
1. Investment
The first one is investment. For your money to earn interest, you need to invest first. Your piggy bank or your mattress will not give you compound interest.
There are many kinds of investment vehicles available out there from stocks, bonds, options, real estate, mutual funds, insurance, jewelries, antiques and many others. You just need to find one that best suits your personality and risk tolerance.
2.Time
The second thing that you need is time. As a general rule, the longer you have been saving, the more money you can expect to make. In short, more time means more opportunity for compounding.
Two-Edged Sword
However, compound interest is a two-edged sword. True, it can help you get richer but it can also help you get poorer; or worse it can even lead to bankruptcy. How? Through bad debts most especially credit card debts.
Most credit card companies use the power of compound interest to their advantage. This means that the interest incurred is applied to your principal amount each time you decide not to pay your total credit card amount due in time. What is more alarming is that compound interest is not added annually but rather to the balance amount to the end of each day.
Thus, compound interest is very beneficial but at the same time very damaging for you. In order to avoid this, make sure to pay the total amount due of your credit card on time. If you don’t have enough budget for it, practice delayed gratification.
Make compound interest your best friend not your worst enemy!
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