Understand power of compound interest


HAVE you ever wished that you could have more money, without all the effort? Or are you concerned you will not have enough saved for your children’s

education, building project, or retirement?
Luckily, there is actually a simple way to accomplish those things if you are willing to learn how to put your money to work for you. It is called compound interest, and it can help you exponentially grow your wealth.
It is a pity most of you do not understand what compound interest is. When you think of interest, you often think of debt. But interest can work in your favour when you are earning it on money you have saved and invested in the bank.
Compound interest can be defined as interest calculated on the initial principal and also on the accumulated interest of previous periods. Think of it as the cycle of earning “interest on interest” which can cause wealth to rapidly snowball. Compound interest will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.
With compound interest, not only are you getting interest on your initial investment, but you are getting interest on top of interest. It is because of this that your wealth can grow exponentially through compound interest and why the idea of compounding returns is like putting your money to work for you.
Let us look at why it is important to save money in a bank now. The magic ingredient that makes compound interest work best is time. The simple fact is that ‘when’ you start saving outweighs ‘how much’ you save.
An investment left untouched in your bank account for decades can add up to a large sum, even if you never invest another ngwee thereafter. The secret is to have steady annual investments, and most importantly beginning at an early age.
If you started investing at the age of 25 and put the same amount of money into a savings account until the age of 35, you would have more money at retirement than if you started saving at 35 and invested the same amount of money every year until retirement.
Compound interest favours those that start early, which is why it pays to start now. It is never too late – or too early to start.
If you are early in your career, it can feel like there are a lot of things competing for your money between planning for your marriage, saving for a house, retirement and more. However, saving now can give you a huge edge on your finances so you can retire stress-free. Also, if you are saving for your children’s education, the power of compound interest surely applies – start saving when they are in diapers and not as they are starting their college search.
Start saving now. If you want to easily accumulate wealth and take advantage of the magic of compound interest, it’s important to start early and be consistent. As you can see in the example above, it’s possible for your money to grow to a large sum with a small initial investment. If you consistently save and invest, you will have a nice nest egg by the time you retire.
The key is to start now and contribute what you can. It may seem like it is not worth it, but even small contributions of K250-K500 per month add up over time.
Time is your best friend and that is the one thing that makes compound interest so effective. Saving now and starting early will pay dividends in your future and help you accumulate extra money. That is the power of compound interest and why it pays to start saving now.
The author is First National Bank Zambia consumer educator.

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