When exploring investment tools, the focus is usually on the interest rate, as a higher rate implies a greater return on investment.
Yet, there's another factor that significantly influences the final result – the type of interest.
Today, let's dive in the concept of compound interest.
Compound interest refers to the accumulation of interest on both the initial amount and the interest earned, essentially earning "interest on interest."
🔹You can try calculating it yourself here.
The renowned economist, John Keynes, called it the "magic" of compound interest.💫
Over extended periods, the original investment amount grows exponentially through this process.
An example lies in the purchase of Manhattan in 1626 by Peter Minuit from local Indians for approximately $25.
Today, the total value of Manhattan is worth billions of dollars.
However, if Peter had deposited his $25 in a bank at 7% interest, he would now possess a staggering $3.6 trillion 😱 – significantly more than the present-day value of the island with all its structures.
It demonstrates how one incorrect decision can lead to immense consequences.
In 1810, the English astronomer, Francis Bailey, calculated that if one invested a penny with 5% interest at the time of Christ's birth, it would yield enough gold over the years to fill 357 million Earth's globes.😱
American president, Benjamin Franklin, adopted a more practical approach.
Upon his death in 1790, he left 1,000 pounds sterling to the city of Boston with the condition that they wouldn't access the funds for 100 years.
By 1890, these funds had multiplied over 72 times, amounting to $332,000.
Apart from the interest rate, an essential parameter is the time for your assets to grow.
To harness the power of compound interest and time to your advantage, you must reinvest the income received into the same or different financial instruments.
This allows your investments to compound and grow over time. ⌛️📈
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