Wealth

Why Compound Interest Means More For Your Bottom Line

By Nest Wealth on 04/07/2016Article 2 Minute Read

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Albert Einstein once called compound interest, “the greatest invention of mankind.”

Albert Einstein once called compound interest, “the greatest invention of mankind.” And we have to agree – compound interest may just be the greatest invention ever (sorry, sliced bread).

Often, when people think of interest, debt is the first thing that comes to mind. But interest can actually work in your favour when you’re earning it on money you’ve previously saved and invested.

Simply put, compound interest is interest earned on interest. Say you start with $1000 in the bank, and the interest rate is 3%. At the end of the year, you’ll have earned $30 (just for parking your money there!). At the end of the second year, you’ll have earned interest on the original $1000, and on the $30 in interest you earned the previous year. The returns on investments themselves become part of the invested amount and start generating returns.

The same principle applies to investing, where annual returns are generally higher than the banks’ interest rates. So as long as you reinvest your money, your investments will earn money for you in the following years (we call that putting your dollars to work).

After some time, investments start generating disproportionately higher returns, making long-term investing particularly rewarding.  In other words, compound interest is mathematical magic!

 

See the difference low fees and compound interest can make to your bottom line – click here.