A guide to building wealth through compound interest

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Compound interest is the addition of interest to the sum of the principle of a loan or deposit. In other words, it is interest on top of interest. This is how it works. When you invest money, you intend to profit over time. If you leave the money alone plus the interest, compound interest applies the interest rate to the total amount of money earned. Your money builds over time.

Simple interest, however, does not accrue. It's gone once you pay or earn interest for a particular period. It is not added to the next payment period like compound interest.

How it works

If you invest $500 and it earns 10% interest at the end of the year, then after one year, you earn 550$. Meaning the original interest earned is 50$. In the second year, you will earn 600$ additional interest and it will keep accumulating over the years. Imagine living the money untouched for 40yrs it will accumulate 26,500$. How fascinating.

Compound annual growth rate

CAGR is an important investment option related to compound interest. It measures the growth of your investment over time. Mutual funds offer great security for retirement benefits. They do not earn a fixed interest rate, and their value may rise and fall. Choose a mutual fund with strong, reputable returns.

 

 

Formula

A=P(1+r/n)nt

P-principle

r-interest rate

n-the number of times the interest compounds each year

t-total number of years you invest your money

A-Your final amount

How to grow wealth with compound interest

Compound interest requires time to invest. Disciplining yourself for the long term is the only way to a desired financial goal. Interest paid is a penalty, and interest earned is a reward.

Increase contribution yearly

An average person is advised to invest at least 15% of his income in retirement. This form of security as you will watch your deposits grow over the years.

Get rid of debt

Compound interest should work for you, not against you. It will make you pay compound interest on the credit card. You will end up bankrupt because the amount you pay back keeps increasing. 

 

 

Start as soon as you can

Do not wait till you are old to invest in your retirement benefits. The more your savings stay in the account, the more your money grows. Start by investing in a growth stock mutual fund as early as possible and reap the benefits.

Learn to be patient

Having long-term mindsets is the key secret to enjoying the benefits of this investment. Leave the money for an extended amount of time. Time is your best friend in this case, the longer you let your money grow, the more it grows.

Types of accounts offering compound interest

Different investment accounts generate compound interest.

  • Savings account
  • Money market account
  • Zero-coupon bonds
  • Dividend stocks

Summary

Compound interest can boost your retirement potential. A successful process of compounding will allow you to use less of your own money to reach a goal. High-interest credit card debt can make compounding a very expensive risk. Reach out to a professional to jam-start your retirement financial goals.

 

WriterCharles Ouko

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