The Power of Compound Interest: The 8th Wonder of the World
Albert Einstein once said, “Compound interest is the 8th wonder of the world. Those who understand it will make money, those who don’t understand will have to pay for it.” It is possible to achieve financial freedom and enjoy your retirement years to the fullest and happily if you understand why compound interest is called the 8th wonder of the world, and apply it to your savings or investment.
Compound interest is when you receive the interest on the savings, you do not withdraw it. You leave it with the principal and reinvest all of it. Compound interest will bring you a “huge” income after a couple of years if you automate the reinvesting process.
Investment genius Warren Buffett once revealed the secret of his 100 billion dollars wealth: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
The good news for you is that you can absolutely become a self-made millionaire if you know how to use the power of compound interest, combined with regular, consistent investment over a long period of time. It can be invested in a lump-sum amount or on a monthly or quarterly basis. We will show you how to calculate in both scenarios.
Let’s start with the first example when you have a lump sum of 1,000,000 MMK. You plan to invest or save with an annual interest rate of 6.5%.
We have two formulas to calculate interest:
*Simple interest: Amount of capital * (1 + interest % * number of years)
*Compound interest: Amount of capital * (1+interest) ^ number of years
If applying simple interest, after 10 years you get: 1,000,000 * (1 + 6.5%*10) = 1,650,000 MMK
And with the compound interest, you will have: 1,000,000 * (1 + 6.5%) ^10 = 1,888,000 MMK (rounded).
To grow more money with time, you will have: 1,000,000*(1+6.5 %) ^40= 12,400,000 MMK (rounded), if you wait for 40 years.
“The longer the milk is fermented, the stronger and ripening the cheese will be”. You can see your finances grow exponentially, the longer you let the compound interest grow.
Some compound interest calculators can help you calculate your numbers easily. You just need to “fill in the blanks” with the principal, the amount you deposit (monthly/quarterly/yearly), how long you save, and the annual interest rate you gain.
Captured below is one example from http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Can your 100 USD (200,000 MMK) help you reach your financial freedom?
The second example is when you save on a monthly basis and do not have a lump sum of money to start with. Don’t worry, you can also be a self-made millionaire too, following the case below.
Let us share what Suze Orman said to understand why you have to start early!
Suze Orman is an American financial advisor, author, and podcast host. She said this on her own TV show – The Suze Orman Show on CNBC Channel.
She says you can become a millionaire if you invest your 100 USD monthly savings consistently, with the multiplicative power of compound interest.
We have calculated for you using the same compound interest tool so you can see what your investment can bring you if you start at 25 years old, investing in the channel with an annual yield of 11.5% (all rounded numbers):
In 20 years, you will gain 93,000 USD or 195,000,000 MMK
In 30 years, you will gain 300,000 USD or 630,000,000 MMK
In 40 years, you will gain 1,000,000 USD or 2.1 billion MMK
Imagine if you miss the beat just for 10 years, say you start at 35 years old instead of 25 you will lose 70% of your financial freedom goal (1.47 billion MMK). Just in 10 years, you can see how much compound interest has grown your money.
We also understand it is not easy to find an investment vehicle that could give you a yield of 11.5%. Follow us when we talk about investments in the later articles.
And as you may know, as we age, we face greater challenges with our families, jobs, finances, and health. When making important decisions, you will be extra careful because of the “mess” swirling around in your thoughts.
So why not start saving and investing early to have a good financial path and become more affluent while we are still healthy, youthful, and have more opportunity to grow capital flow?
The Rule of Discipline: Consistency and Resilience
Don’t forget the most crucial rule when we talk about compound interest: discipline. Regardless of whether you have recently achieved the “highest” yield for your saving deposits, or received a “bargain” return on your investments, you won’t be able to enjoy the growth without having discipline!
Compound interest will break if you plan to “dip” your hands into the capital gains in order to pay for a new handbag, or fund a luxury vacation. When you withdraw these earned interests and break the cycle of compound interest, you may need to put more effort into rebuilding the capital again.
So, please keep in mind that starting to save money early gives you a benefit; using compound interest over time will enable you to reach your financial objectives. If you’re persistent, you’ll get to taste the cheese in your golden years of retirement like a millionaire.