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)t
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 $|
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.
- 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