You can also crunch some numbers using different rates, periods of time, and compounding frequencies, at the Securities and Exchange Commission’s website. For example, if you had $1,000 that was earning a 6 percent return, it would grow to $2,000 in 12 years (72 divided by 6 equals 12). It uses the rule of 72, which basically says if you divide 72 by your rate of return, you’ll find out how fast your money will double in value. It’s for a slightly older audience – probably college students – but it illustrates compounding in way that most pre-teens and teens would understand. You can also watch this video by the Financial Literacy Center, a joint center of the RAND Corporation, Dartmouth College and the Wharton School. That could help boost your child’s “interest.” But if you want to encourage your child to save, consider adding a matching contribution – say, 25 cents for every $1 saved. TIP: It’s hard to find accounts or real-world investments that pay a steady 5 percent or 10 percent return. Then run through a simulation like the one above, calculating the next interest payment on the principal-and-interest total each time. You can teach compounding using your own change jar and there are lots of good resources on the web.įor the low-tech method, dump your change jar out on the floor and tell your children they will invest $1 at 10 percent interest. Increasing the compounding frequency or your interest rate, or adding to your principal, can all help your savings grow even faster. That’s because the next interest payment equals 5 percent of $1,050, or $52.50. The second year, you would have $1,102.50. After the first year, you would have $1,050 – your original principal, plus 5 percent or $50. You just need to start.So let’s say you invest $1,000 (your principal) and it earns 5 percent (interest rate or earnings) once a year (the compounding frequency). You don’t need to start with a huge amount of money. The secret is to start as soon as possible. The great thing is that just a moderate investment over a long period of time will set you up for your future. Really, you need at least 20 years of regular investment to begin to see significant financial rewards. The sooner you begin to save and invest, the longer compound interest has to work its magic and grow your wealth. But, by investing early, and allowing your money to grow through compound interest, you can double, treble or better the real amount you put away.Ĭompound interest needs one thing to become a key contributor to your wealth: time. As we’ve seen in my previous blogs, this figure can seem daunting. When planning for your future, you should always have a figure in mind for how much will you need to support yourself in your retirement. Thanks to compound interest, the amount of money this investment will have created for you is just shy of AED 1.9 million. The actual cost of your monthly AED 2,000 investment is AED 600,000 (AED 24,000 x 25 years). You invest well and earn 8% interest over a 25-year period. When you start to create regular savings and investing it, you begin to make serious money.įor example, you save and invest AED 2,000 per month or AED 24,000 per year. ![]() So at 5% interest, you can double your money in 16 years - pretty easy money for doing nothing. Using the above example, after 5 years you’d have AED 12,762, in 10 years you would have AED 16,288 and you would have doubled your money in 15 years. Your money is generating more money just off the interest. And that’s the beauty of compound interest. You are making interest on your interest year-on-year. ![]() Just by leaving your money in the account, you’ve made AED 1025. A moderate return.Īt the end of year 2, the 5% interest rate is calculated against the total figure in your account, AED 10,500. You have AED 10,000 in your savings account and the bank offers 5% interest per year.Īt the end of year 1, your balance will stand at 10,500 after the 5% interest rate is added. Compound interest gives savers the ability to seriously increase their wealth. But not as many people seem to grasp how interest can work in your favour. Nearly everyone has a pretty good idea what interest rates are: You borrow money, you pay interest, like a rental fee for borrowing money. High credit card interest, high rates when getting a loan - generally it’s not the most positive word when discussing finance. ![]() There’s always a lot of talk about interest and most of the time it’s pretty negative.
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