The Power of Compound Interest

We would like to share with you this excellent article on the power of the compound interest, published by Canterbury Property Services back in 2017.

One of the most important subject when it comes to saving  – Compound Interest. No matter what your age, now is the time to begin saving for retirement.

The rich are not rich because they earn a lot of money; the rich are rich because they saved a lot of money. Those who become wealthy do so by spending less than they earn. There is no other source of saving and by extension, of building wealth.

If saving is the key to wealth, then time is the hand that turns the key to unlock the door. There is no reliable method to quick riches. There are however, proven methods to get rich slowly. If you are patient, and if you are disciplined, you can produce a golden nest egg that will hatch later in life. It might appear that the pittance you save now could not possibly make a difference, but that is because you haven’t considered the extraordinary power of compound interest.

The power of compound interest

The best way to ensure your future financial success is to start saving today, even if all you have seems like a paltry sum. The amount of capital you start with is not nearly as important as getting started early. “Procrastination is the natural assassin of opportunity. Every year you put off investing makes your ultimate retirement goals more difficult to achieve.”

The miracle of compound interest is the secret to getting rich slowly. Even modest returns can generate real wealth given enough time and dedication, but mainly time.

On its surface, compounding is innocuous, even boring. “So what if my money earns less than 3 percent in a high-yield savings account?” you may ask. “What does it matter if it averages 8 percent annual growth in a mutual fund? Why is it important to start investing now?”

In the short-term, it doesn’t make a huge difference — but don’t let that fool you. On the slow sure path to wealth, we need to keep focused on long-term goals. Short-term results are not as important as what will happen over the course of 20 or 30 years.

The growth of annual $5,000 contribution

Compounding can be made even more powerful through regular investments. It is even more exciting to see what can happen when you make saving a habit. If you were to contribute $5,000 annually to a structured plan for 45 years, and if you left the money to earn an average 8 percent return, the retirement savings would grow to more than $2 million, as you can see from this chart:

A golden nest egg indeed! You would have more than eight times the amount you contributed. The dark green part of the chart dwarfs the light green, which is the money you have put in.

This is the extraordinary power of compound interest!

The cost of waiting one year

It’s human nature to procrastinate. “I can start saving next year,” you tell yourself. “I don’t have time to start — I’ll do it later.” But the costs of delaying your investment are enormous and even one year makes a huge difference.

The difference is so dramatic when you look at what you lose by waiting a year even though you regularly contribute to your savings. If you make annual contributions of $5,000 to your structured plan as shown in the example, waiting just one year will cost you more than $150,000! That is probably more than your annual income.

There is another way to look at the cost of delaying. If you still wanted to have a $2 million nest egg at age 65, but you wait five years to get started, the annual contributions would have to increase to nearly $9,500 — that’s almost double. If you were to wait until age 40, you’d have to contribute nearly $55,000 a year.

How to get rich slowly

You can make compounding work for you by doing a few simple things:

1. Start early. The younger you start, the more time compounding has to work in your favour and the wealthier you can become. The next best thing to starting early is starting now.

2. Make regular investments. Don’t be haphazard. Remain disciplined, and make saving for retirement a priority. Do whatever it takes to maximize your contributions.

3. Be patient. Do not touch the money. Compounding only works if you allow your investment to grow. The results will seem slow at first but continue on. Persevere! Most of the magic of compounding returns comes at the very end. Compounding creates a snowball of money. At first, your returns seem small; but if you are patient, they will become enormous.