Money & The Law Of Compound Interest

Compound interest is a type of interest that builds interest upon interest already earned.

If you leave your money collecting compound interest for long enough (such as over the course of your working life), even a small amount of money can turn into a significant amount.

Types Of Compound Interest

Compound interest can be calculated at different rates. The best type is where it is calculated on a daily basis, and this is usually found with savings accounts.

Less preferable is interest calculated on a monthly or yearly basis, as over the course of time you will get a lower rate of return on your money.

The Rule Of 72

The rule of 72 is a simple rule that you can use to determine how long it will take for your money to double at a given rate of interest.

To work this out you just divide the interest rate you are getting into the number 72.

For example, if you are getting 5%  interest on your investment, then 72/5=14.

This means your money will double in 14 years at that rate of interest. Give it another 14 years and your money would have doubled again.

Depending on how long you keep your investment going, providing you started saving early enough you will have a lot of money left over for you when you retire. That’s the magic of compound interest.

Don’t Touch The Money You Save

There is one golden rule that you absolutely must follow when it comes to compound interest, don’t touch the money you save!

If you do you will lose the power of compound interest, and even though you may use only a little bit of your savings, you could be giving up what equates to a very large amount later on.

So the key to compound interest is to start early, invest your money on a regular basis and never take anything out of your savings. If you follow this rule you will be rich when you retire.

For example, let’s suppose a person saves £100 each money starting from when they are 21 and ending at age 65 when they retire, at a compounding interest rate of 10%. By the time they reach 65 they would be a millionaire.

To ensure your financial security, make it your goal right now to open up a saving account and then resolve to save a certain portion of your income each month for the next five, ten or even twenty years. One day in the future you will be glad you did.