What We Should Know About Compound Interest

One of the life lessons that I wish I had learned earlier on in life was about the beauty of compound interest. Well, if you're clueless about what is it, compound interest is defined as the "interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan" according to Investopedia.

In fact, it is said that the genius Albert Einstein called compound interest as the 8th wonder of the world. Now that is something worth studying about! 

Basically, it means if you start saving your money when you're young in a financial instrument which gives out a consistent yearly interest and let it grow without you withdrawing any amount of it, by the time you're old, you'll be a millionaire rich!

And you don't even have to start with a lot of money!

Take a look at this table to see how compound interest works and how it can make you rich. For the sake of illustration, I'll use these assumptions and stop once it hit $1 million:

• You're contributing $250 per month which is equivalent to $3000 a year (which is realistic in my case) 
• And the yearly interests is about 10% (which is realistic as well)

There you have it, now everyone can be a millionaire in their lifetime! (you can argue a million is not a huge amount but it's better than nothing right?) Do take into consideration that you also have the potential to contribute more than $250 per month which will significantly boost the amount and reduce the time needed to achieve your target.

But is it really that simple? Of course NOT!

Now, the key component in tapping the power of compound interest is 

1. You have to discipline yourself to contribute consistently!
2. You have to discipline yourself NOT TO withdraw the money throughout the years
3. Yearly interest return from the financial instrument is consistent 

I learned this lesson slightly later in my life than I would want to. I'm currently putting in money consistently and continuously seeking financial instruments which can give me a consistent return (stock market, REITS). The above table serves as my blueprint to become a millionaire and I'm proud to admit that I've been putting more than $250 per month in order to tap into the magic of compound interest. 

To help you with the calculation of compound interest as well as the time & monthly contribution needed to achieve your financial goal, do use this simple Compound Interest Calculator.

So, what are you waiting for? Save your money TODAY and when you're old, you might be glad that you learned this lesson at some point in you life and get started.

And do share this out especially to the youth as they have the advantage of time.

p/s: The power of compound interest also works AGAINST you. So if you have debt (especially credit card), the interest from it will be compounded against you. Now guess who gets to enjoy the positive effect of compound interest in this case? The Bank.