Here’s an interesting question for you:
Would you prefer interest rates to be high or low?
It really depends on which side of the interest you’re on, doesn’t it?
If you are in debt, borrowing from the bank or taking a loan to buy your house; you would want it to be as low as possible.
However, if you’re saving with the bank, buying insurance or investing in some sort of bank stock; you would definitely prefer interest rates to be higher.
So what am I trying to drive at here? Whether you benefit or suffer from higher interest rates depend on which side of the divide you belong to.
And as with all epic battles you see in life, you get to pick your own side.
Every once in a while over here at WealthMastery, we come across a topic that we feel it’s so important that everyone ought to hear about it. Today, the topic of compound interest is probably one of those that fit this bill.
Compound interest is so important that the greatest physicist of our time had this to say about it:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
– Albert Einstein
So here are 3 important characteristics of compound interest that you ought to take note before it’s too late:
1) Stay On The Right Side Of Interest
If you are going to pick a side, make sure you pick the right side. Be on the side that is earning interest on your money instead of paying it.
There are many ways to earn interest on your money. You can save it, insure it or invest it. For a start, it doesn’t matter how much interest is earned on your money as long as you pick up the right habits.
Many have fallen to the “dark side” of interest by reckless spending and borrowing money that they cannot afford. They end up paying the painful price of interest and then wonder where all their money had gone to.
2) Start As Early As You Can To Take Advantage Of The Compounding Effect
One of the irritating things about compounding interest is that it will almost certainly start slow. It might even be so slow that you fail to notice it.
However, it will slowly but surely pick up speed. It won’t be long before you find it becoming this unstoppable juggernaut that steamrolls everything in its path. By then, I hope you are standing behind it reaping the benefits of its momentum rather instead of standing in front of it with the hope of stopping it.
Look at this screen grab from a retirement article on Business Insider. This spreadsheet calculates how much you need to save/invest month at different interest/return rates in order for you to retire with $1,000,000 when you’re 65.
If you were a visionary 25 year old, you could have set aside $500 per month at 6% to get your $1,000,000 forty years older. However, if you only started worrying about your retirement when you’re 40 years old (as most people do), you got to fork out a whopping $1,400 per month!
Remember the article about how you’d probably need more than $1,000,000 to retire?
My friends, it’s high time you get started…
3) Stick To It And Let It Compound Your Returns
No matter how powerful compound interest is, it can only do its job if you stick to it. Even if you make 6% return a year on your $500, you are not going to get your $1,000,000 if you keep withdrawing the profits you make.
Similar, even if you save $500 per month without investing it, you will not manage to retire comfortably. Making 6% a year is not an impossible task, if you are first willing to invest in your investment education.
Image Credits: promfih.com, businessinsider.sg