THE MIRACLE of COMPOUND INTEREST
The miracle of compound interest encourages us to leave our investments untouched. The term 'compound interest' refers to the fact that if you leave an investment alone, each year you will earn interest on both your capital and the previous year's interest. This enables your investment to increase in value at an exponential rate.
The graph below demonstrates the compound growth on a single investment of $1,000 at an earning rate of 12% per annum.
This chart shows the growth of a single investment of $1,000 if earnings of 12% per annum are compounded. Tax is ignored as the aim of the graph is to show the effect of compounding. Notice that almost nothing seems to be happening in the early years but the balance grows faster and faster as time passes.
As you can see, although slow to start, the growth of this investment accelerates as time progresses, so much so that growth in the last five years is greater than the growth over the first thirty!
Unfortunately, upon seeing little return from the first few years of investment, most people spend their savings and never realise the benefits the magic of compound interest has in store for them!
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