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The Science of Compound Interests (1)

From where we left off last time as we weighed the pros and cons of investing and savings, one thing that makes investing stand out is because of compound interests. As such, we are about to explore different aspects of it today!

Ever wondered about the magnificent snowball effect? This is actually how compound interest works! Similar to a snowball, the calculation of compound interest takes your capital together with the interest rate into account every time, so that it keeps snowballing and multiplying all the way through your investment timeline. This method of earning is relatively passive, but slurping in a huge sum of money in the long run. Hence, the longer the investment, the larger the compound interests. Apart from this solid fact, the power of it might as well depend on different factors, namely interest rates, taxes and time.

1. Interest rates

The sum investors earned through saving or investing, presented in percentage.

2. Taxes

Your earnings directly affect your tax payment. In this case, there is a positive correlation between your income and tax payment. So amateur investors might have to find the equilibrium of these two.

3. Time

This indicates your investment timeline. As a longer time frame allows an increasing chance for the snowballing effect to take place, the benefits of long-term investing are unquestionable.

Referring to the diagram below, we can gain a further insight of the benefit mentioned. Take $1,000 and an interest rate of 10% as an example, within the first 10 years, the magic of compound interest has already flipped your capital of $1,000 to $2,600! What’s more wide-eyed is, your earnings could potentially reach $789,700 70 years later. Thus, long-term investing is definitely your key to success.

After getting to know the sorcery of compound interest, we are off to exploring other examples next week. Follow our social media to stay in the loop!

Source: https://wealth.visualcapitalist.com/visualizing-power-compound-interest/

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