# 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

## 3 Replies to “How to Make Compound Interest Even More Effective”

1. 100% agree with this in theory it’s easy however what’s easy to do is not always simple 😉

Liking your blog and will stick around!

1. Thanks for the kind words Jef! I agree with you completely, having the guts to stick to your investing plan through thick and thin is never easy but in the long term it turns out to be rewarding