Compound Interest is the eighth wonder of the world. He who understands it … earns it. He who doesn’t … pays it.
Albert Einstein
Compound interest may be compound, but it’s not complex!
First, let’s take a look at SIMPLE Interest …
Let’s take $100, making simple interest of 5% a year.
This means that your balance will increase by 5% every year,
in this case, $5.
Year 1 … $105
Year 2 … $110
Year 3 … $115
Year 4 … $120
Year 5 … $125
and so on …
Now let’s look at Compound Interest …
That is interest that compounds annually, in other words, interest on interest, which results in exponential growth over the long term.
Year 1 … $105.00
Year 2 … $110.25
Year 3 … $115.76
Year 4 … $121.55
Year 5 … $127.63
and so on …
With SIMPLE interest, your balance grows at a constant rate, but with COMPOUNDING interest, your balance is growing at an increasing rate.
The true beauty and sheer power of compound interest reveals itself over time. Just to show you using our previous example of $100 …
After 30 Years …
Simple Interest Account = $250
Compound Interest Account = $432.19
That is 73% MORE!
Compound interest can be your best friend if it is working for you!
It’s also important to understand that it can be devastating if it works against you; think credit cards! Why is it important to talk to your kids about Compound Interest?
Many people don’t understand financial literacy until it is almost too late. They are thousands of dollars in credit card debt, tens or even hundreds of thousands of dollars in student loan debt, or nearing retirement age with little to no savings. If we start out teaching kids money skills early in life, they may avoid many of adulthood’s financial mistakes.
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