![]() Savers who stay invested often only appreciate the power of compounding in the years close to retirement when they really see their money grow rapidly. But if you do, you will not experience the power of compounding when you are older. When you are saving for the long term, as you do when you save for retirement, your savings can initially seem small and you may be tempted to draw them out. It may be at a more modest level than the game inventor's rice, but over many years compounding can get your investment ahead of that of someone who starts saving more than you but starts later than you. If you reinvest these distributions they will compound. These investments will earn you earn dividends that will grow with inflation and you will also earn interest on any bonds or cash in your fund. ![]() How to earn compound interest on your investmentsĪn investment in a bank savings account or money market account or fund will earn interest that can compound if you reinvest the interest.īut you will see a bigger impact of compound interest if you invest in the likes of unit trusts or exchange traded funds that have some exposure to equities or listed property. On the 41 st square, the king was liable for a trillion grains and by the time the 64th square was reached, the king was up for 18-trillion grains of rice.Īccording to the legend, the reward bankrupted the king, forcing him to hand over his kingdom.Īlthough you are not likely to double your money each month or year, the legend illustrates the power of compounding. However, when the grains were counted out, they soon mounted up: at the end of the first row, there were only 128 but by the 21 st square, the king had to supply more than a million grains. The king, who did not understand the power of exponential growth, readily agreed. The man asked for a grain of rice to be placed on the first square of the chess board and for that grain to be doubled on the second square, and on each subsequent square until, the 64 th one. The answer will show you how quickly your money will double. Take 72 and divide it by the interest rate you are earning on your money. If you want to know how quickly the money you have saved will double, use the rule of 72. Happy with the new game, he asked the inventor of the game how he could reward him. ![]() To understand compound interest, it helps to remember an often-told tale about a Persian king who loved games and was presented with the game of chess. This is because interest is added each month to the amount you owe in addition to the interest added in previous months. The longer you take to pay off debt, the more interest you will pay. It is also easy to forget that when you take out debt, compound interest works against you – which is why Einstein said if you don’t understand it, you pay it. However, small amounts saved for long periods can also harness the power of compounding as long as your growth, or interest rate, beats inflation and you reinvest that growth or interest rather than having it paid out to you. It is easy to underestimate how powerful compound interest is in making your money work for you, especially when you start investing with a small amount, and it feels like it will never amount to much. He is also widely believed to have described compound interest as “the eighth wonder of the world” and to have said: “He who understands it, earns it, he who doesn’t, pays it.” This is the reason why, when asked what the most powerful force in the world was, Albert Einstein apparently replied “compound interest”. It helps small investors who invest long term do better than investors with more money who start later. It can supercharge your investment, especially when you have time on your side. What are stokvels and how safe are they?Ĭompound interest is the magic that happens when you earn interest on interest or growth on growth.Can I transfer savings in a tax-free savings account to an account with another provider?.What are the differences between saving in a tax-free savings account and a retirement fund?.What do I need to know about investing in a tax-free savings account?.What do I need to know about investment risk and time?.What do I need to know about investment risk?.Infographic: Why is it important to diversify across asset classes?.Why is compound interest so important in investing?.How can I make money investing in listed property?.What is a bond and how can I invest in bonds?.How can I make money investing in shares?. ![]() How do asset classes classify the things in which you can invest?.What are the key things I need to know before I start investing?.How do I set savings and investment goals?.What is the difference between saving and investing?.How can I save when there is more month than money?.
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