The Power of Compound Interest
By Dale Gillham | Published 09 October 2018
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. Compound interest is the most powerful forces in the universe. It is hard to argue with Einstein, as the power of compounding interest really is one of the most useful tools investors have.
Warren Buffett famously stated that “someone is sitting in the shade today because someone else planted a tree a very long time ago”. The true meaning behind this statement is what is referred to as the law of delayed gratification. In other words, by taking action today, you can enjoy prosperity in the future.
A great mantra that resonated with me in my very young days was “I will do today what others won’t so I can play tomorrow where others can’t” Unfortunately, too many people don’t do this and instead make a choice to sit on the sidelines waiting for something to happen rather than taking action to make it happen. But the earlier you start taking action, the more you are able to take advantage of compounding.
Calculating the power of compound interest
Compounding can be explained by understanding the rule of 72. If you understand the rule of 72, you can use this to compound your investments successfully.
Quite simply, if you divide seventy-two by a particular annual return, you will be able to determine how long it will take to double your money. For example, a seven per cent per annum investment will double in value in a little over ten years. A fourteen per cent per annum investment will double in a little over five years.
Let’s say you want to double your money every eight years, you would simply divide seventy-two by eight to arrive at an annual growth rate of nine per cent. Therefore, any invest you investigate must generate that return so that you can compound your return to get you where you desire.
The Rule of 72 can also be used to calculate the effect of inflation on any money you choose not to invest. For example, if the annual inflation rate is four per cent, it will take eighteen years before your money will be worth half of what it is today.
While the Rule of 72 is a simplistic methodology for calculating the time it takes for your initial investment to double or for your money to devalue, it is also important to understand the impact the impact that your investment and inflation will have on the growth of your wealth over time.
Accelerate your wealth by applying the power of compound interest
All too often people do not consider these factors and as a result struggle in retirement as they have not generated enough retirement savings from compounding their investments. This compounding strategy is one of many that I teach in my new book ‘Accelerate your Wealth’.
If you would like to learn more about the power of compounding and how to accelerate your wealth, then buy my book, which is available at all good book stores and online.
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