Derek Condon
Jun 14 · 2 min read

This is the first of a ten-part series where we look at Haven’s Ten Commandments, a short list of investing fundamentals we believe everyone should understand.

___

Albert Einstein referred to compound interest as ‘the most powerful force in the universe’, a pretty big statement considering the magnitude of his studies and pursuits.

Compound interest is the ‘secret stuff’ that really makes investing work for you. I think we all have heard about compound interest in one way or another, and it sounds good but only if we know two things. How it works, and how we can take advantage of it.

Compound interest is really a straightforward concept. In exchange for investing money, you get to earn interest (money) on your money. It’s flipping the roles of paying off debt, instead of you paying interest you’re in a position to earn it. Compound interest works by earning interest on the principal amount (money you invested) and overtime on the interest your money makes.

Let’s look at an example to help paint a clearer picture. Let’s say you invest $100 and earn 10% a year.

Compound interest at work — 10% interest rate is constant, but Interest Earned increases each year.

As you can see in the table, we aren’t adding any additional money, but each year our Interest Earned increases because it incorporates the value added from the interest. This example is a very small scale, so let’s check out an example of a one-time contribution of $10,000.

The longer the period of time, the more compound interest can work for you, the greater the payoff.

Over 40 years the advantages of compound interest are honestly a bit unbelievable. The longer your money is invested, the more time it has to work for you, and the bigger the increases in value.

This is how you can take advantage of compound interest, get your money working for you by investing it for the long term. Start early and stay committed.

Derek


This article is for informational purposes only not all information will be accurate. This should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.

Making of a Millionaire

Stories about money, personal finance and the path to financial indepndence.

Derek Condon

Written by

Create. Educate. Explore. Winnipeg based Financial Advisor, trying to help people make the most of their financial future.

Making of a Millionaire

Stories about money, personal finance and the path to financial indepndence.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade