The Joy of Savings : Compound Interest
When I was young, I would say around ten years old; my dad taught me two magic words – compound interest. Yes at that time interest rates were 12%... ahh the good old days. Today you would be lucky to even get 2% annual interest for five years. So how do we start saving to gain from the joys of compound interest?
Ok, take a look at your bank statement, look for the interest amount. I bet that the number is very small, right? Ok, so when you look at the interest accumulated on your bank account it’s sad, isn’t it? Back in the 80’s interest rates were 13%-18% - sigh… today we are lucky to get 2%.
Every wealthy person I know, I have three multi-millionaire friends – all self-made, and they all live by two rules, save more than you spend, and build wealth. When I asked them how they manage their funds, all of them talked about compound interest. The most important thing is time, yes, the growth will be a bit slow, but the beauty of compound interest is time.
Here’s how compound interest works:
Quite simply, compound interest is interest, on top of interest. This is calculated by multiplying the principal amount by the annual interest rate, and this rate is raised to the number of compound periods.
So for example, let’s say you have $10,000. The interest rate is 3% and the term for the compound interest is 6 years. .
10,000 x ((1.05)6-1) = $2656.95.
So in 6 years your original $10,000 has now grown to $12, 656.
Opposed to simple interest:
$10,000 x .03 x 6 = $1800
With simple interest your $10,000 only grew by $1,800 in 6 years.
This is because unlike simple interest, compound interest accrues on both the principal and the accumulated interest.
Ready to get started saving so that you can get moving on some compound interest?
Follow the simple four steps and you will reach your goal in 365 days…. Trust me this will be quick!
Step 1– Determine the amount that you would like to save for this example, lets aim to save $5,000 in 12 months
Step 2 – Divide $5,000 by the number of pays you receive a year. For example, if you get paid every two weeks, that’s 26 paydays a year. So this will be $192.31 per pay that you should save
Step 3 – Tell your bank to automatically transfer $192.31 every payday to a “high” compound interest account. Be sure that you can not access these funds via online banking or at the ATM. If in a real pinch, ensure that you can only access this cash by going into the bank and visiting the teller.
Looking forward to hearing how it is all going!