Einstein supposedly described compound interest as the eighth wonder of the world. It is believed to have developed during the middle ages but this cannot be said with much certainty. This article will attempt to explore what is so magic about compound interest.
What is component interest? In simple terms it’s interest on top of your interest. For example, say somebody puts £100 in the bank and the interest rate is 10%, after a year the amount in the bank account increases to £110. The following year the total amount, not just the initial investment gains interest so the new amount will be £133.10.
How do I work out my compound interest? Simply use this formula. Future interest= Current amount x (1+interest rate) Number of years.
Who champions compound interest? Warren Buffett, the man worth almost $90 billion, made compound interest the basis of his retirement plan. Calculating that the $127,000 he had saved would be enough to sustain him by making use of compound interest.
What are the pros of using compound interest as a means of saving? It is often relatively low risk as the bank is likely insured. It also requires very little effort and you do not have to do hours of research to see which the best investment would be. Simply look for accounts that offer the highest interest rate to maximise returns.
What are the cons of compound interest. In terms of savings, you may make less than if you were to invest in the stock exchange and it often requires a large amount of time to see meaningful returns. Compound interest can also be a big negative when it comes to paying off debt, particularly credit cards. This is because the longer you wait to pay off the debt, the more the amount rises.
When to make use of compound interest? As soon as possible! The sooner you invest your savings the other the value will start to snowball. In many cases it is less about the amount invested and more about the time.