The Power of Compound Interest

Compounding Interest

Compounding interest maybe one of the smallest, common tools where you can see it everywhere to the point you may think it is a common way of earning. I too, did thought that it was another regular saving investment method available until I came across this theory from a book and it shocked me that it was actually much more powerful than I thought about.

So, what is all about compounding interest? Compound interest simply means that with every principal amount you invest / save, it will generate some portion of interest. Which if you decide not to use the money and the interest and letting them to continue compound the interest, it will grow even much more.

For example, if you start your investment by putting 100 dollar and you earn 2% annually, you will get 2 dollar as interest. If you decide not to reinvest your interest, this mean that every year, you will only have 100 dollar in the account and you earn 2 dollar per year. However, if you decide to put the 2 dollar into your 100 dollar, which makes it into, 102 dollar now and you decide not to use it. You will get 2% out of 102 dollar, which mean you will get 2.04 as interest this time. If you reinvest again the 2.04 into your 102 dollar which you have 104.04, you will get 2.08 interest out of 104.04 in the third year. So if you compare with invest 100 dollar and spend all the interest, you will only get 2 dollar each year. But if you decide to invest all and do not spend it, you will get 2.08 interest at the third year.

The table below will show you the earning which if you invest specific amount each year and letting it compound over the time, it will yield you powerfully.

If invest 1200 every year and compound 10% interest every year:
10 years – 21,037.40
20 years – 75603.00
30 years – 217132.11
40 years – 584222.17

If invest 2400 every year and compound 10% interest every year:
10 years – 42074.80
20 years – 151206.00
30 years – 434264.22
40 years – 1168444.35

If invest 3600 every year and compound 10% interest every year:
10 years – 63112.20
20 years – 226809.00
30 years – 651396.33
40 years – 1,752,666.52


The main key to the power of compounding interest is that:
You do not spend any of the amounts in it.
You keep on invest specific amount into it for a very long period of time
The sooner you start, the better it is


The formula for the calculation is:
F= C (1+r/n)nt

Where:
F = future value
C = Initial Deposit
R = interest rate
N = number of times per year in compound
T = number of years invested

For a simple and easy of your own calculation , try this following link:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm


While it may seem to be a long time, for those who wish to reach the target of reaching a million in a more conservative and safer way, this may be one of the most powerful ways for you in your current situation.