If you’re at all like me, you’re a multitasker and constantly busy: career, relationships, hobbies, personal projects, family… Sometimes there’s just not enough hours in the day to do it all, not to mention find time for yourself, and find time to learn everything you can in order to become the next Warren Buffett.
In my articles, I’m constantly encouraging readers to learn everything they can about personal finance to get out of debt, take control of their money and build a nest egg for themselves that provides a nice cushion.
But if you’re constantly on the go, and struggle to find the time, consider this article your cheat sheet to growing your money with little-to-no effort. Combined with automated saving and investing, there’s one secret weapon out there that will ensure your money grows and works for you while you do nothing at all except carry about your daily life. What is this secret weapon you ask? It’s the magic of compound interest.
Compound interest is when your principal sum (the amount you originally invested/socked away) earns interest, and this interest is added back to the principal sum, increasing it and therefore increasing the amount of interest earned. Compounding is that act of adding interest to the principal sum, and in turn, growing it. Think about it: if you choose an investment that is relatively safe, but has a decent interest rate, you can just deposit a big chunk of money and let it grow and grow as it continues to earn interest on itself. Cool, eh?
Even cooler, in ten years, you can grow $30,000 to almost $65,000 – more than double your money – by doing absolutely nothing. Don’t believe me? Let’s break it down:
You plunk down $30,000 in an investment that yields eight percent per year.
After one year, you have $32,400 ($2,400 is earned interest).
After two years, you have $34,992 ($2,592 is earned interest on year one’s balance).
After three years, you have $37, 791.36 ($2,799.36 is earned interest on year two’s balance).
After four years, you have $40,814.67 ($3,023.31 is earned interest on year three’s balance).
And after ten years, you’d have $64,767.75 ($4,797.61 is earned interest on year nine’s balance).
If you decided to add $200 per month, your investment will grow to more than $102,000 by the tenth year! To calculate the different amounts earned on different interest rates you can use a simple online calculator, just search “compound interest calendar”.
Aside from taking advantage of your job’s pension, investing, and stock purchase plans (the one time you’ll hear me encouraging you to max anything out), talk to your bank or financial planner about helping you choose some investments you’re comfortable with. Even if you don’t have tens of thousands of dollars lying around, it’s still possible to reap the benefits of compound interest by investing a little each month.
Written by M. Alice Allen.