While most of us may not be able to access the seven wonders of the World in the near future, we can still access the eighth wonder of the world, compound benefits (or compound profits).
This is according to Albert Einstein, who said (presumably) "Compound interest is the 8th wonder of the world. He who understands it, obtains it; he who does not, pays for it."
Imagine you go out with your friends for lunch, and the line of delicious RM10 meals looks quite long. Your friend might say "I'm ready to queue for food, but you have to pay me 5% interest per minute until the food is ready." You agree to these terms for a bit of fun, but the food takes almost 15 minutes to order and make. Do you know? You only pay 200% of the initial value of the item, and nicely buy your friend’s lunch. What a good friend of yours!
But why are the benefits so high in just 15 minutes? A lot of interest is to blame (or thanks from your friend’s perspective).
With compound interest, interest is calculated based on the initial principal (i.e. food cost) plus the interest previously charged;
Therefore, after the first minute, you will pay 5% interest of RM10 (50 sen).
The second minute, you pay 52.5 sen, as the 5% rate is applied to the new amount of RM10.50.
With each subsequent minute, the amount of interest paid increases, and after only 15 minutes, the original RM10 debt will double.
As Albert said, those who understand the benefits of compounding get it, and those who don’t, pay for it. Compound interest works against you when you pay it to someone else, usually in the form of debt, but when you earn compound interest, such as through a savings or investment account, the potential to raise your money starts to shine. Just as interest can increase, so can your investment.
While the food example is quite fun and playful, imagine a similar situation with your hard -earned money. With the market often returning a long -term average of around 5% per year, in a normal market cycle, one can expect to double their initial funds after a period of 14 to 15 years.
However, the market is unpredictable, and with past performance not being a reliable indicator of future performance, there is no guarantee your investment will double after 15 years.
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BUSINESS & MONEY
