Magic Of Compound Interest

Compound interest is the eighth wonder of the world.

Why is compound interest so important? Well, let me simply illustrate an example using a penny as an analogy. Imagine this scenario: would you take a million dollars today, or a penny that doubles every day for 30 days? This might be a surprising answer, but you actually come out ahead by taking the penny in this scenario. Let me explain. It's quite simple: your money is doubling at an exponential rate, meaning every day for 30 days, your money is being reinvested just like a dividend at a 100 percent compounded rate. This results in an astonishing $5,368,709.12! Below, I've illustrated a visual picture of the results in action.

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Compound Interest Calculator: Wealth Multiplier

Now that you understand the basic concept of interest being calculated on the initial principal and being reinvested to accumulate more interest, generating growth of your investments, I'm going to help you use a compound interest calculator to illustrate the real value of this concept. We'll use the invester.gov compound interest calculator.

Now that you have the website open, input the following options:

  • Initial Investment: $0
  • Monthly Contribution: $96
  • Length of Time in Years: 47
  • Estimated Interest Rate: 10%
  • Compound Frequency: Annually

You might be surprised by the results. You end up with an astounding $1,004,515.03, with total contributions amounting to $54,144.00. This example assumes you are 18 years old and your goal is to retire at 65 with a million dollars, based on the average return of 10% from the S&P 500 with dividends being reinvested. Simply adjust any of the numbers, such as Initial Investment, Monthly Contribution, etc., based on your financial goals. Have fun playing around with the calculator. There's a light bulb moment that goes off when you fully grasp the concept. This is why compound interest is considered the eighth wonder of the world.

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