Is compound interest the eighth wonder of the world?
According to Albert Einstein, who knew much about the effects of time, yes it is.
But what is compound interest, and why is it so powerful? Bridge to Prosperity, Burnaby’s strategic business and wealth management firm, explains that the effect of compound interest occurs when money is earning money over time.
While your investment might start out small, before you know it, it becomes quite significant. The beauty is that it works continuously, even while you sleep.
Here’s an example.
Tom and his brother Joe both decide they want to invest for their eventual retirement at the age of 65. Tom invests $5,000 per year for 10 years starting at age 45, then stops for 10 years, while Joe starts investing the same $5,000 for 10 years at age 55.
Assuming a five percent annual rate of return on their investments, Tom ends up with more than $107,000 at 65, while Joe ends up with only $66,000.
This happens even though they both invested the same amount of money ($5,000) because of the power of compound interest.
Tom’s money continued to grow for 10 years after he stopped investing and waited for his retirement. If Joe wants to end up with the same amount of money, he needs to invest more than $8,100 per year.
So, start early, even if you start small. You will probably be better off this way than starting late, or not starting at all.
Bridge to Prosperity is passionate about helping people better manage their finances by utilizing their extensive accounting and financial backgrounds to develop a clear plan based on a client’s current financial situation and their short and long-term goals.
Email info@BridgeToProsperity.com or call 778-776-4334 to find out how they can help put the power of compound interest, and other beneficial strategies, to work for you.
GuidedBy is a community builder and part of the Glacier Media news network. This article originally appeared on a Glacier Media publication.