Would you choose $1,000,000 or a magic penny that doubles in value every day for a month?
So on day one, you have one penny; on day two, you have two pennies; on day three, you have four pennies, and so on.
How much do you think the magic penny would be worth by the end of the month? And which option would you choose?
Believe it or not, the magic penny would be worth more than $10 million thanks to the power of compound interest!
The power of compound interest
The magic penny clearly illustrates the power of compound interest and how important it is to build wealth and achieve financial freedom. The main thing is to start investing and take advantage of compound interest as soon as possible. The last days of the chart are where the growth is most significant.
It also highlights how small amounts can add up significantly over time and something is better than nothing. For someone looking to achieve financial freedom, compound interest may be the most powerful tool available to do so.
To earn compound interest, an investor needs to continually reinvest their returns. Hence why it’s often referred to as “interest on interest.”
Compound interest is significantly more profitable than simple interest (where the accumulated interest is not combined with the initial amount).
Let’s look at a basic example:
An investor has $1000 in a savings account with a 5% annual interest rate. In year 1, they’d earn $50 on the $1000. So the new balance is $1050 at the end of the first year. In year 2, they’d earn $5 on $1050, or $52.50. So, the new balance is $1102.50 at the end of year 2.
Thanks to the power of compound interest the savings account balance will grow exponentially over time as interest is earned on increasingly larger amounts.
If the investor kept the original $1000 in this savings account for 10 years they’d end up with $1,629. After 20 years, they’d have $2,653. And, after 50 years they’d have amassed $11,468.
With compound interest, timing is everything. The earlier one starts, the more time the more time the money has to grow.
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Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.