Every one of us has studied the Compound Interest as one of the annoying chapters in our fifth grade. How many of us remember its usage and application? You know at times I think Technology has spoiled us, as most of us have put behind manual calculations completely. Thinking back and trying to recollect those applications, I had a chance to discover that Compound Interest is an effective and compelling application in the domain of funds and capitals.
Instead of explaining theories in Compound Interest, let us consider an example:
Two people named Edward and Emmett are planning to put aside some money for the future.
Edward saves a hundred dollars per month into a miraculous venture with an interest of 6% per year. At the end of forty years, he accumulates a lump amount of $199,149.
Emmett:- Emmett, starting a year with the same amount of hundred dollars a month in the same miraculous venture ends up with only $186,417 in thirty nine years!
With another $1200 and an additional year will provide $12,732 as savings for Edward. He becomes a fortunate man receiving a larger sum than what he contributed.
A hang on for another year and the same $1200 contribution will confer $199,149 for Emmett even if Edward stops his hoards. 40 years, at any point will remain 40 years. In addition of a year of cutbacks, Edward terminates 6% interest to the lead. He will receive $211,098. (‘Time and tide waits for none’ proves true here. Will anyone complaint about old proverbs now?) If we perceive coherently, Emmett is at a loss of $12,000 for nothing but Waiting..Waiting..Waiting…
Not 1, but 40!
The concept of Compound Interest is more effective if the number of years (N) is high. The reason is having supplementary time at the closing stage for the investment boost up. Considering the above example of Edward and Emmett, Emmett saving nothing at the end of one year and Edward saving $1,233; the variation seems to be inconsequential, Emmett being a tad behind schedule. Looking ahead after 40 years, Edward’s small initiative has grown itself hugely in 40 years. Emmett’s diminutive fault was not being sentient.
For sport-freaks, Golf can be a perfect example to explain this notion. While playing golf, minor minute amends in the golf swing can cause theatrical changes in the direction of the golf ball. If the ball is not stroked evenly or if the face of the club is slant, the ball might hook or wedge over a 100 yards or more. The distinction will be enormous. This is the case in hording money and Compound Interest. The early will sow the seed; the sooner it can be reaped. Analogously the earlier we make an investment, the larger it will grow.
Plan Banking, not which bank
Individuals are worried on making their mind up about the amount and place to invest and this constraints them from making an investment itself. The place is never considered a factor in investing. And the amount starting small and restricting ourselves in our daily routine through someway and saving $1 can endow with $30 a month. If we restrict ourselves some more, try hard saving $3-$5 will grow itself into $90-$150 a month. Something is always better than nothing. Saving a penny a day can also yield us some amount of money at the end.
Contemplating about the place is up to us. Investing in the stock market or index funds or online savings account or a fixed deposit or a place with elevated revenue of complete (100%) payment is okay. On condition that we are saving money, the means through which we do it not of any importance.
Let’s act like Edward and not like Emmett.
Choose wisely! Live well!
