The Amazing Power of Compound Interest

Natalie Schmook

October 13, 2019

Albert Einstein reportedly described compound interest as “the most powerful force in the universe”. But what is this powerful force and how can it help you grow your investments?

The basic premise is this: if you have $100, invest it, and it grows by 10% per year, at the end of year 1, you’ll have $110. But next year, since $110 invested instead of $100, you’ll earn $11 instead of $10 on that same initial $100. By the end of year 10, that $100 would be worth $259.37—more than 2.5x your original investment. A powerful force indeed.

This also highlights the importance of saving early (parents, share this with your teenage and adult kids!), even at moderate amounts. Take the following illustration into consideration: two doctors, both saving a total of $470,000 over 30 years, both in increasing increments to reflect career development. Both earn 6% per year on their investments. The only difference? One started 10 years earlier.

Not only did the doctor who started early end up with more than $300,000 more, but the doctor who started later had to save much more out of their cash flow just to get the same amount of total savings in. In fact, in order to end up with the same pool at the end as Doctor #1, Doctor #2 would have had to save $160,000 more over the 20 years he or she was invested.

The moral of the story is the earlier your start the better, even in small amounts. And it’s never too late to start saving! Markets will go up and down but if you’re letting compound interest do its thing (with a prudent investment strategy, left alone to grow), over time you too can take advantage of “the most powerful force in the universe”.

FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY.

The views expressed here are as of the date of publication and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer (or recommendation) Hayes Wealth Advisors to sell or provide, or a specific invitation for any investor. Information herein may have been obtained from sources believed to be reliable, Hayes Wealth Advisors is unable to warrant its accuracy.

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