If you have ever wondered why the rich always get richer the reasons may surprise you. It often comes down to two things.
They spend less than they earn
They earn interest on top of interest (compound interest)
The
first reason is quite obvious. If they spend less than they earn then
they will always have more money. Hence, they will always get richer.
The second reason more or less turbo charges the first reason. Say for
instance you have $10,000 in an investment account. If that account has
an interest rate of 10% then after one year you will have $11,000. If
you don't spend any of that money, after two years you would expect to
have $12,000 after the interest is applied. However, you will actually
end up with $12,100. This is because you have earned interest on top of
interest. RightPane. the 10% interest was actually applied to the
$11,000. This is an example of Compound Interest. Now I bet you are
thinking 'so what. I only earned $100 more than I expected'. And that is
correct, but what you need to consider is the long term effects of that
extra money being compounded. The figures below show what would happen
to that $10,000 if it was invested for different lengths of time at a
10% interest rate.
10 years = $25,937
25 years = $108,347
50 years = $1,173,909
100 years = $137,806,123
As
you can see the amounts of money increase by a staggering amount over
time. However, realistically, you are unlikely to invest your money for
50 or 100 years unless you are particularly keen on your descendants. If
however you were spending less than you earn and you also invested say
$500 per month on top of that original one off $10,000 investment, your
money would grow as follows.
10 years = $126,742
25 years = $730,393
50 years = $8,535,637
100 years = $1,009,366,604
You
are reading that correctly. After 50 years you would have over 8
million dollars, and after 100 years you would have over one billion
dollars! This is not a trick. The maths is accurate. What is even more
amazing is the huge effects a few small changes can have can have on the
outcome RightPane. If you use a 12% interest rate as opposed to a 10%
interest rate in the example above, your money would grow as follows:
After 10 years = $143,195 - this is 13% more than before ($126,742)
After 25 years = $1,022,004 - this is 40% more than before ($730,393)
After 50 years = $18,226,138 - this is 114% more than before ($8,535,637)
After 100 years = $5,282,730,057 - this is 423% more than before ($1,009,366,604)
I
bet you're now thinking, 'I wish I was rich, so that I can take
advantage of it'. The good news is you don't have to be rich to benefit
from compound interest. You could potentially gain from it by investing
any amount you feel comfortable with. Try this out for yourself on a
Compound Interest Calculator.
Source: FinancialKnowledgeBase
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