Tuesday, March 25, 2008

Use Compound Interest To Help Your Money Grow

Are you looking to become financially independent? Then it’s a good idea to start saving money at an early age. The earlier the better. Once you start saving your money a magnificent concept called compound interest comes into play and begins to do great things for your money. Your money begins to grow at an astounding rate.

So amazing is this concept that Albert Einstein called it the one of the greatest inventions of mankind. So let’s take a look at this amazing concept at work and how it allows your money to grow and expand. In this first example let’s say you are 25 years of age and you invest $50 per month until you are 65 years old. Upon reaching that age you will have accumulated $24,000 and this is assuming you have earned no interest.

Now we can change the details and assume the $50 you were investing was earning interest at a rate of 4%. Instead of $24,000 you will instead have earned $59,295 because of the compounding effect of interest. The same $50 invested for the same period of time but at a rate of 7% will now accumulate to $132,006. Taking the same $50 and now using a rate of 9% it accrues to $235,822. The final example yields $594,121 using an interest rate of 12%.


25 year old person invests $50 until they turn 65 years old.

$50 =================> $24,000
$50 (4%) ===========è $$59,295
$50 (7%) ==========è $132,006
$50 (9%)=============> $235,822
$50 ( 12%) ==========è $594,121

To examine this concept more lets take a look at another example. What happens when you wait five years later to start saving the same amount of money at the same rates of interest. If a person is 30 years old and they save $50 per month until they reach the age of 65 they will have accumulated $21,000. Right up front we notice that this person ends up saving $3,000 less than the person who started at the age of 25. Following the example further using the same rates of interest we are faced with some amazing outcomes.

A 30 year old person investing $50 per month at a rate of 4% until the age of 65 will have accumulated $45,839. This is approximately $15,000 less than the 25 year old. It gets worse as we go. Look at what happens with the interest rate of 7%. The 30 year old will only have accumulated $90,578 at the age of 65.
At 9% they will have only accumulated $148,192 by the age of 65 and using a rate of return of 12% the earnings are only $324,763. This is roughly $270,000 less than they 25 year old person would have accumulated, and it’s all because they waited 5 years later to start saving. This is due to the amazing effect of compound interest, which is interest being paid on top of interest.

Compound interest is simply adding any accumulated interest earned back to the principal and the interest now becomes principal. Interest can be compounded for different periods of time including yearly, semi-annually, monthly, weekly or daily.

Now of course you have to understand that the aforementioned examples are just that theoretical in nature and they are not written in stone. What’s not taken into effect is the effect that taxes will have on your money. Even if you continuously invest without fail every single month there is no guarantee you will yield a profit, in fact you could end up losing your initial principal. What happens to your principal and interest will largely depend upon market conditions and could result in some fluctuations therefore causing you to lose your principal. The assumption here is that interest is compounded monthly.

And finally do not take the aforementioned examples as investment advice. It is my advice to you that you should still consult with your financial planner or advisor for more particulars regarding the investment of your hard earned money.

To Your Great Success

Mel Richardson
VisionStar Enterprises

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