Power of Compound Interest

The Power of Compound Interest

“The most powerful force in the universe is compound interest”. – Albert Einstein. How can we use the power of compound interest to grow your investments, become a millionaire and retire early?

Compound interest is the interest earned by your principal and any interest earned on the earned interest, and so on. It quickly adds up and grows into a massive snowball.

The Power of Compound Interest

If you save $10,000 into a savings account that yields 10% interest. I get it, no savings account today will give you anywhere near that, but let’s use that as an easy example. After one year, that $10,000 have received $1,000 in interest and have grown into $11,000. If you let it sit for another year, it will receive another 10% interest on the $11,00 which is $1,100 and your total is up at $12,100. That additional $100 in interest, which is the interest on the previously earned interest is the compound interest.

YearMoneyInterest
1$10,000$1,000
2$11,000$1,100
3$12,100$1,210
4$13,310$1,331
5$14,641$1,464
6$16,105$1,611
7$17,716$1,772
8$19,487$1,949
9$21,436$2,144
10$23,579$2,358

Notice how quickly it grows once the compound interest works over some year and picks up traction. The longer you let interest compound, the more powerful gains you get. Little drops of water makes the mighty ocean.

Pro tip: There are many mutual funds that by average grows more than 10% per year. You can realistically expect 12% or more per year over a 10 year period.

Let compound interest work for you, not against you

“Compound interest is the eight wonder of the world, and that he who understands it, earns it; he who doesn’t pays it”. – Albert Einstein.

Now that you understand the power of compound interest, make sure you let this force work for you and not against you. Avoid debt unless absolutely necessary, especially credit card debt where the interest rates are high. The rich gets richer by using this force to build wealth. Poor people stay poor when the power of compound interest works against them.