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  • Writer's pictureJames Veal

Do You Know Compound Interest Can Make You Rich

I have a simple question for you today. Would you choose to have a million dollars now or instead take a nice (shiny) penny and double the amount for 30 days? Which one will bring you more riches?

Before you answer that question, let's take a quick peak at this phenomenal strategy called compound interest.

The Power of Compound Interest

  • Compound interest is interest earned from the original principal plus accumulated interest. Not only are you earning interest on your beginning deposit, you're earning interest on the interest.

  • Albert Einstein famously said that compound interest is the 8th wonder of the world. It is the most powerful force in the universe.

  • It magically turns a little bit of money, invested wisely, into a whole lot of cash.

  • What you have here is when you save and invest; your money earns interest, or appreciates. The next year, you earn interest on your original money and the interest from the first two years.

  • Think about compound interest a bit like what happens when the "snowball effect" occurs. A snowball starts small, but the more snow that's added, the bigger it gets. As it grows, it becomes bigger at a faster rate.I

To make compounding work for you, follow these three basic principles:

  1. The sooner you start the better. For example, a 25 yr old needs to invest only $175 per month (10% return) will become a millionaire when they retire at age 65. Now, a 40 yr old would need to contribute $850 (10% return) per month to attain millionaire status at age 65.

  2. Make regular investments. Take advantage of your 401(k) and 403(b) at work and IRA accounts as well. These are tax-advantage investments in which no taxes are deducted while they are growing. The more you save, the more you let compounding work its magic. Even a little bit goes a long way.

  3. Be patient! Compounding works only if you allow your investment (capital) to grow. It takes time to see the wonders of compounding returns. Invest wisely and leave your money alone over the long tern.

Ok, now you're probably convinced of the magic of compound interest. I hope you got a chance to answer the question that was proposed earlier in the article on whether you would take one million dollars if it was offered to you or choose a shiny penny that'll double each day for 30 days. Which one did you choose?

Well, here goes the verdict! By taking a penny now, in 30 days you would have accumulated over $5,368,000. That is more than $4 million dollars than if you’ve taken the $1 million at month-end. You were correct if you chose the penny.

Doubling a Penny Everyday for 30 Days

Day 1 = $0.01

Day 5 = $0.16

Day 10 = $5.12

Day 15 = $163.84

Day 20 = $5242.88

Day 25 = $167,772.16

Day 30 = $5,368,709.12

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