Finance 101: Why compound interest is magical
MAKE SURE YOU SEE THE LINK AT THE BOTTOM OF THE POST TO ACCESS A FREE COMPOUND INTEREST CALCULATOR
I know that personal finance often seems complicated.
I mean just look at how complicated all the major financial medial outlets make it sound. For the most people, trying to understand these media outlets is like trying to do the conversion from Fahrenheit to Celsius manually. Seriously, check out the formula:
F = 9C/5 + 32. Then you need to solve for C and then substitute in F to get the answer.
Alternatively, I can get Google to do it for me in seconds without getting the math wrong.
In many cases, simple is great. Managing our finances and building our own personal wealth should be no different. Yes, at times, finance can require complex calculations. However for most people, depending on their situation and the scenario, the answer is … be disciplined, save and enjoy the amazing benefits of compound interest.
As mentioned in our first finance 101 series, compound interest is magic! (CLICK HERE TO SEE POST)
Here is what Albert Einstein reportedly said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
In compound interest, we invest some money (the principal), which earns interest after a period (like a year or a month). Then that interest is added back onto the principal (the original investment), and the whole amount is invested to make even more interest in the next period. And so every period, we earn more and more.
Check out this example:
- Let’s say you start with a principal of $10,000 and earn 7% in interest at the end of every year (don’t get stuck on the interest rate, this is just an example).
- Look at the results!
- In five years, your money would be worth $14,024
- In thirty years, your money would be worth $76,123
- You see, compound interest is magic!
Now it’s your turn to use our free calculator. The link is at bottom of the post
How does it work?
Select either “Regular Savings” or “Target Savings”:
- Regular savings lets you pick how much you are going to save per month or per year and then it calculates what you have saved after a number of years.
- Target savings works backwards. If you want to save $50,000 in say 10 years, this calculator is for you. It will show you how much you need to save each month taking into consideration both interest and inflation.
Complete the other fields (for inflation you can use 2.5% – remember a dollar today is NOT the same as a dollar will be in 10 years) and click calculate. And voila! You get a summary!
- Use some actual numbers to see how long it would take you to achieve your savings goal (click here to get reminder).
- Try increasing your savings by 10% and 20% to see what difference this makes. It could be worth cutting down on some expenses (like reducing what you spend on luxuries, housing, transport, groceries, etc.) so you can crank up your savings rate!
CHECK IT OUT
Click here to access the COMPOUND INTEREST RATE CALCULATOR