Forex Mentor: The Magic Of Compound Interest
Find out more about the Magic of Compound Interest in this specially written article by our very own CEO, Mario Singh.
Let me explain the term "Compound Interest" as simple as I can:
Compound interest simply pays you interest on your principal; then, when it’s time to pay interest again, you’re paid interest on your principal AND the previous interest that you earned.
In other words, the interest that you’re paid adds to and becomes part of the principal that accrues interest during the next period. You have a continuously growing principal amount without having to make another deposit. But if you do choose to make regular deposits to go along with your automatically-growing principal, over time, the results can be positively staggering.
Compound interest makes your money work diligently for you, continually FEEDING UPON ITSELF to grow at a substantially faster rate than with simple interest.
It’s no wonder that Albert Einstein called compound interest “the eighth wonder of the world”.
The 8th Wonder, Compound Interest
One of the ‘secrets’ of the wealthy is long-term investments that pay compounded interest. Every savvy investor, when given a choice between a good investment with compound interest and a great investment with simple interest, will pick the good investment every time.
They know that, over time, the investment that compounds will outperform the other. Now, this leads us to another interesting point. Firstly, what is defined as an "investment?"
An "Investment" is defined as an instrument having a two-fold purpose:
1) It generates INCOME
2) It increases in VALUE over time
Hence, if you "invest" a lump sum (known as capital), you should get regular small payments of some kind AND the actual value of the capital itself INCREASES, i.e. the lump sum gets BIGGER.
Lets take a look at an "investment" which compounds over time. Lets say you start off with a capital of USD3000. The capital then generates a consistent COMPOUNDED return of 5% every month.
Over 1 year, the investment would look like this:
The Chart of Your Investment in A Year
Here’s where the significant effect of compound interest can be seen more tangibly. In the first month, the return of 5% a month yielded a profit of USD150 (from USD3,000 to USD3,150). In the last month of the year, the return of 5% a month yielded a profit of USD256 (from USD5131 to USD5387).
On retrospect, the “investment” didn’t have to work any harder to generate the extra absolute return. It still was 5% every month.
This is the magic of compound interest.
With simple interest, this investment would only generate a total return of 60% a year. However, with compound interest, the investment would generate a handsome return of 79.59% a year – almost 20% MORE than if simple interest was used!
Over time, the magic of compound interest can be truly mind-boggling. Your investment would look like this:
The Chart Your Investment with Compound Interest in A Year
Here's the GOOD news: If you start investing EARLY, you would only need to start with a small invested amount of USD3,000 to see a significant return of USD1 million in 10 years.
Here's the BAD news: If you start much LATER, you would have to start with a higher initial capital to reach the same goal.
As an example, if you start investing 5 years later, and want to achieve the same financial results, you would have to play "catch-up" and start-off with an invested amount of USD56,037.
There's now only ONE question left in your head.
"Which investment can give me a compounded return of 5% a month?"
Lean a little closer and I'll tell you... FOREX Trading.
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