Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't, pays it.” According to Investopedia, compound interest is, “Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.”
Essentially what this means is, the interest is continually growing on the previous interest, as opposed to interest only gained on the initial investment. This compound interest can be one of the most beneficial tools to any investor, and can allow for some incredible gains on initial investments over time.
Let’s assume that the average person starts saving when they are 30 years old for retirement, and they save $5500 a year for 35 years until they retire at 65. If they make 10% returns on their annual savings, on compound interest, they will have $1,490,600 when they retire at 65. This is a much larger number than if they were to just save $5500 and not invest it, as they would only have $192,500.
On the contrary, if you are a savvy investor and start at 22 years old, right out of college, and save $5500 a year for 43 years until you retire at 65, with the same annual returns of 10% with compound interest, you would have $3,258,200 when you retired.
This is a $1,767,600 difference, and you would only be sacrificing an extra $44,000 of your own money. This example truly shows how powerful compound interest is, and how investing as soon as possible, can help you reap the benefits down the road.
The main point of compound interest is to use it to your benefit to invest as smart as possible. The younger that you get started, the more you can make, as you can see, and our personal advice would be to start saving for the long term as soon as possible. The longer you hold onto your investments, the larger they grow incrementally. Start saving for either a house, a car, or for your retirement as soon as you graduate from school, and your future self will be thanking you.
