Albert Einstein once said that compound interest coupled with time was the most powerful force of all time. He was a pretty smart guy!

Compound interest is really a math concept that shows the power of making interest  not just on your principal but also on the interest. If you have $1000 and you make 5% interest, after the first year, you will have $1050. If you let the interest compound, the second year you will not make $50 of interest again but rather $52.50 of interest because you are making 5% off the $1050. After the second year you will have $1102.50. In the third year, you will have $1157.63

The rule of 72. The rule of 72 is an easy way to estimate the effect of compounding. Basically the rule of 72 works like this. Take an interest rate like 5% and divide this number into 72. 72 divided by 5 equals 14.4. The answer is the number of years it take for money to double. In other words, $1000 at 5% will double to $2000 in 14.4 years. At 6%, it will only take 12 years for money to double in value. A 1% increase in interest rate cuts the time frame by 2.4 years.

Keys to making compound interest work for you:
Time – Investing early is very advantageous because with the math of compound interest it plays a big role in helping you to grow your money. Compound interest and time has sometimes been referred to as the eighth wonder of the world. Let’s show you a quick example of the benefits of starting early.

But first, here is my question to you; If someone would offer you to choose from one of the following two options, he is ready to give either a onetime lump sum of $10,000 OR he can give you for the next 30 days starting today with one penny, tomorrow 2 pennies and will go on to give you every day double the amount of the day before until the 30 days end, which of the 2 choices would you choose?

are you ready for my choice? I would pick the penny doubled every day for 30 days, Why? although that in the first week it does not even reach to be worth one dollar, at day 30 it is already worth more than $5,000,000 and if these 30 days would of started only one week late with the first week missing it would be worth at the end only approximately $100,000 this is the power of time, the power of doing it earlier with 7 days!!!

Cindy Elizabeth is 25 and starts investing $1000 per year right away. She invests $1000 per year for the next 10 years for a total of $10,000 but then gets married, starts having kids and wants to stay home with the kids so she quits work.

Elizabeth’s twin brother late Larry took some time off to travel Europe. He then came back and instead of working decided to go back to school and get another degree. He starts working at the age of 35 and starts putting away $1000 per year for the next 30 years. Over that 30 years, he invests a total of $30,000 which is three times more than his sister Elizabeth.

At age 65, Elizabeth and Larry compare portfolios and Larry is shocked to see that he only has $122,346 compared to Elizabeth’s portfolio of $157,435. Even though he invested 3 times the money, he has less because compounding plays a big role if you can start investing sooner than later.

Compound interest is an old concept but is very powerful and such an important one to know.