Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it”. While some people question whether the quote was in fact from Einstein, the power of compound interest is unquestionable.
Here’s an interesting example. If you were to be given a sum of money after 30 days, which option would you choose?
- $10 million in one go
- A magical one dollar coin will be given to you now, and its amount will double every day for the coming 30 days, i.e. it will become $2 tomorrow, $4 the day after tomorrow, $8 two days after tomorrow, and so on…
Most people would go for the $10 million option as it is hard to imagine that $1 doubling 30 times will become $1.07 billion! This is the power of compound interest - your principal would accumulate with interest earned during the investment period, yielding more returns. The longer the investment period, the more you will benefit from compound interest.
Never blindly pursue high-return investments
The above example of doubling a dollar a day may sound unrealistic. However, in the real world, many do expect to have their investment returns double within a short period of time But the fact remains, the higher the potential returns, the higher the risks. Simply put, the more returns you seek, the higher the chance of losing money.
By contrast, a stable investment with a lower return is less risky, and over time it can also yield good returns through compounding effect. You don’t need a huge investment capital – even if it’s only $2,000 or $3,000 a month, you can still accumulate a good sum of money through long-term investing with the power of compound interest. Let’s input your monthly saving amount to see the effect of compounding:
How much will I get in the future?
Amount you have already
Monthly investment
Expected return rate (p.a.)
Period
Amount at the end of the investment period
Error occurredPlease input valuePlease input numberPlease input a smaller numberPlease input a bigger numberPlease input a whole numberPlease input text
Having a longer investment horizon is important as the effect of compound interest may not be obvious in the short term, but will be realised over time. While young people may not have much money to invest with, time is on their side and they are in the best position to take advantage of compound interest to accumulate wealth.
