How to Make Compound Interest Even More Effective

We have all heard the famous maxim by Albert Einstein:

“Compound interest is the eighth wonder of the world.”

There is no doubt that compound interest is a powerful force, but the true power lies in the time given to let compound interest do it’s work.

The formula for compound interest is simple: P(1+r)

This means if you put $5,000 (P) in a savings account and it grows at an interest rate of 6% (r) per year (t), after 1 year you would have:

(5,000)(1+.06)1  = $5,300

So after 1 year you earn $300 on your initial contribution of $5,000. That’s not bad. But what if you let that $5,000 sit in that savings account for 30 years instead? After 30 years you would have:

(5,000)(1+.06)30 = $28,717.46

WOW. After 30 years your $5,000 grows into an impressive $28,717. That’s awesome. This is assuming you don’t contribute any money into the account after your initial contribution. But what if you contributed $5,000 every year for 30 years?

It turns out that after 30 years you would have a whopping $419,008.40

So when you combine the power of compound interest with the power of making contributions every single year, your money balloons to a massive amount. But there’s still one problem with this…30 years is a long time to wait. To speed up this process you simply need to contribute more money each year.  What if you managed to contribute $30,000 every year?

Year Contribution Total Contributions Total $
1            30,000                         30,000             31,800
2            30,000                         60,000             65,508
3            30,000                         90,000          101,238
4            30,000                      120,000          139,113
5            30,000                      150,000          179,260
6            30,000                      180,000          221,815
7            30,000                      210,000          266,924
8            30,000                      240,000          314,739
9            30,000                      270,000          365,424
10            30,000                      300,000          419,149

After only 10 years you would have $419,149

That’s an incredible amount of money in a short period of time. Obviously to save $30,000 every year is no small feat, but through increasing your income (through promotions or starting a side hustle) and minimizing your expenses, it’s certainly possible to save this much and even more every year.

Key Takeaways

  • To speed up the power of compound interest, don’t just contribute money on year one – keep contributing every year
  • To amplify the power of compound interest, find ways to increase the amount of money you contribute every year

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