Why Compound Interest Matters

Once dubbed by Albert Einstein as the 8th wonder of the world, compound interest is undoubtedly the most powerful tool that can get you to financial wealth. However, very few people know of its benefits, or they don’t believe in it enough to make the necessary effort and make it part of their financial plans. Luca Caruana, a Certified Money Coach, and the creator of the Money Coaching Hub discusses the benefits of compound interest and shares tips to help you start implementing it.

WHAT IS COMPOUNDING?

Compound interest is when you begin earning interest on the interest you receive – this makes it possible for your money to multiply at an accelerated rate. Let’s say you managed to save 1,000 euro this year, and invest the sum in a fund that earns you approximately 10% interest per year. You would have 1,100 euro after one year. If the fund earns another 10% the next year on that 1,100 euro, you end up with 1,210 euro by the end of year two. The process continues, until eventually the original lump sum, i.e. the 1,000 euro will be eclipsed by the amount of interest you gained.

Getting The Most Out Of Compounding

Your money can compound more effectively when you give it more time to compound. That is why many financial professionals advise that the earlier you start saving and investing, the better, since your money will have more time to grow, and even weather any financial downturns, recessions and a period of inflation, which may all erode the returns that you hope to achieve over time.

There are several compound interest calculators available for free on the internet that can help you calculate how much your money can grow over a period of time. Patience is the ultimate ingredient to building your wealth nest when it comes to compounding.

For example, imagine a person - let's call them Jake or Stephanie - is 30 years old and wishes to save 1 million euro by the age of 65 (the year they plan to retire). They can afford to save 500 euro per month to achieve this target, but they already calculated that if he or she saves this amount regularly and puts it in a normal bank account, they would have 210,000 euro by their 65th year. Quite a way off the 1 million target.

But what if either one decides to invest the 500 euro instead? What if they start putting it in a balanced investment portfolio and let it grow there over time, giving the money time and space, and letting it flourish? With a 10% annual return, both Jake and Stephanie would have their 1 million each by the age of 60 (5 years before their target retirement age).

Baulking at the 500 euro regular monthly savings? I get it, it is not always easy to save such a sum regularly. Let’s take it a notch lower and go with 300 euro a month instead. You will still end up with approximately 600,000 euro by age 60, or even the sum both Jake and Stephanie wanted, a whopping 1 million if you’re willing to wait another 5 years (i.e. till the age of 65) to cash in your money.

Time Is The Magic

What gives compound interest its superpower?

Time! Patience is key if you want to reap the rewards of this financial tool - quitting early won’t get you far. With a bit of self-control, your hardearned money will work wonders with just enough time and effort on your part. Now that’s something worth waiting for!

A Money Coach is not a financial adviser or a financial planner. A Money Coach focuses on your relationship with money, how your current behaviour with money has developed, and what you can do to make it better. For more information and other informative articles visit moneycoachinghub.com

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