The importance of Compound Interest

401k

My guess, you are thinking – no technical jargon, please. Well, Compound interest sounds more complicated than it really is. In a nutshell, compound interest is making money off of the money you already made, or interest off the interest you’ve already made (this is why credit card companies have gotten so rich).

Let me make this even simpler for you by showing you an example of how compound interest works: When you invest $1000 at 5% interest, at the end of the year (assuming the interest is compounded annually, some places compound more frequently, results in better return for you) you will have $1050 ($1000 times 1.05). So, you made $50 interest on your money.

If you keep that same investment in for another year and at the same rate, you will have $1102 ($1050 times 1.05). So, you will have made $52 in interest the second year, or a couple of dollars more that the first year, on the same intial investment.

The third year, you take that $1102 and reinvest it once again, and now you have $1157, or you’ve made $55 in interest. The following year you do the same, take the $1157 and reinvest it at 5% interest. The results are you now have more than $1214, or over $57 in interest made in one year.

Do this for several more years and your interest earnings will grow exponentially and you will be extremely happy with the results.

So, why is this important you ask? Well, as you see in the above example, if you keep reinvesting your money – you will get greater and greater returns (for doing nothing more than reinvesting your money)!

The next lesson is: Learn about diversification and the keys to being successful in all market conditions.

Don’t have time to carry on now? Come back at your leisure, but don’t wait too long, every dollar wasted is a dollar not working for you. Also, consider signing up for my daily updates sent right to your in-box. Don’t worry, I hate spammers too.

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