The Power of Compound Interest
Albert Einstein once said that compound interest was the
most powerful force on earth.
most powerful force on earth.
What is compound interest?
In simple terms, compound interest is the effect of interest
being earned, paid or on interest.
being earned, paid or on interest.
If you had £100 in the bank earning 7% interest per annum at
the end of the year you would have £107. In year two, you are earning 7% on
£105, not £100.
the end of the year you would have £107. In year two, you are earning 7% on
£105, not £100.
The Rule of 72
If you did not touch the interest or savings and the
interest continued at 7% per annum how long would it be before your money
doubled?
interest continued at 7% per annum how long would it be before your money
doubled?
The answer is just over 10 years.
Look at it from another point of you, if you have a credit
card debts rolling up at 20% per annum, how long would it be before your debt
doubled in size? The answer is just over three years. However, let’s assume you
are paying the minimum 2% off of your debt balance, and for the sake of this
exercise we assume that effect is that you will be paying 18% on the debt. It
would still only take four years before your debt has doubled in size.
Furthermore, just paying the minimum payment on your balance would probably
take decades before you could clear it.
card debts rolling up at 20% per annum, how long would it be before your debt
doubled in size? The answer is just over three years. However, let’s assume you
are paying the minimum 2% off of your debt balance, and for the sake of this
exercise we assume that effect is that you will be paying 18% on the debt. It
would still only take four years before your debt has doubled in size.
Furthermore, just paying the minimum payment on your balance would probably
take decades before you could clear it.
I’ll give you a quick way to work out how long are some
doubles based on an interest rate. It’s called the rule of 72.
doubles based on an interest rate. It’s called the rule of 72.
If you divide the interest-rate that you are earning into 72
or take 72 and divide it by the interest-rate this will give you the
approximate number of years will take to double.
or take 72 and divide it by the interest-rate this will give you the
approximate number of years will take to double.
In the above example, if you’re earning 7% per annum, seven
into 72 is just over 10, therefore it will take just over 10 years before your
money will double.
into 72 is just over 10, therefore it will take just over 10 years before your
money will double.
If I offered you the choice of either £1 million for one
penny doubled every day for 28 days, which would you accept? The obvious answer
is to take the £1 million, but you’d be wrong to take it, as one penny doubled
and compounded over 28 days comes to £1,340,000. Amazing isn’t it. Day one, one
penny, day two, two pennies and so on until day 27 it is £650000.
penny doubled every day for 28 days, which would you accept? The obvious answer
is to take the £1 million, but you’d be wrong to take it, as one penny doubled
and compounded over 28 days comes to £1,340,000. Amazing isn’t it. Day one, one
penny, day two, two pennies and so on until day 27 it is £650000.
Word of the day
Compound interest and the Rule of 72.
There are more examples and practical steps to getting rich
and being happy in my book, Yes, money can buy happiness, I cover the 3 R’s of
Money Management, the Money B.E.L.I.E.F System and much more. Check it out on
Amazon http://bit.ly/2MoneyBook
and being happy in my book, Yes, money can buy happiness, I cover the 3 R’s of
Money Management, the Money B.E.L.I.E.F System and much more. Check it out on
Amazon http://bit.ly/2MoneyBook
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