Compound Interest: Could It Be Magic?
“My wealth has come from a combination of living in America, some lucky genes and compound interest.” – Warren Buffett
Warren Buffett is considered by many to be one of the greatest investors to have ever lived. He is now one of the wealthiest people in the world with wealth estimated at over $75-billion. That’s after he has given a bunch away!
From his quote, let’s look at the third variable – Compound Interest – for purposes of this article. Compound Interest is a powerful wealth-building factor. It is like a snowball rolling down the hill, building on itself, and getting so strong that it almost cannot be stopped.
How It Works
Compound interest is essentially putting your money to work by investing it and allowing the return you make on investment to build on itself as it grows larger and larger over time. With compound interest you won’t see much at first. But as that number grows, you will see a rapid increase in the amounts that come from bigger numbers bringing you bigger returns.
The most important things an investor can do in the quest to accumulate wealth is to invest early and invest consistently. A young person at age 25 will likely have at least a 40-year career. If he or she puts aside $5,000 every year and earns a compound annual return of 5 percent, the compound value of the investment by age 65 will be more than $600,000.
Compare that to another person that puts off saving until age 45. If they put aside $15,000 per year (triple the amount) and earned the same 5 percent compound return, by age 65 they would end up with less than $500,000. That is the enormous power of compound interest. Even tripling the amount won’t make up for the shorter period of investing. It is TIME that performs the magic when it comes to compound interest.
Albert Einstein called Compound Interest the “8th wonder of the world.” He was amazed how time, with little effort, would have such an effect on wealth.
What You Can Do
So the key is to start now. We like to tell people to live on 90% of their income. ALWAYS take 10% of your income and invest it into something. You won’t really miss the 10%. After a few years, once that 10% grows, you will be glad you harnessed the power of compound interest.
You should read up on strategies for building wealth to decide what is right for you to invest that hard-earned money. Here are some areas: active income, passive income, building assets, risk vs. reward, etc. Just take action and let the power of compound interest work for you.