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.
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.
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.
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.