Investing for the long term is important and very effective. Compounding is the key. Even Albert Einstein said that compound interest is “the most powerful force in the universe.” It gets more powerful the longer you use it because the money you make on your principal starts earning money too.
This is how it works:
– If you begin with $10,000 earning 10% interest, at the end of year 1, you’ll have $11,000.
– The next year, when your now $11,000 earns 10%, you’re making $1,100 in interest and you have got now $12.100. So, you made already $100 more on your interest than the year before.
– By year 5, you are already making $1,464 in interest. This is a 46% increase in your interest payments over year 1 and you have $16,105 at year-end, an increase of 61% from your initial $10.000 you invested..
– By the end of year 8, your account has more than doubled.
– In year 9, your interest is more than double the original $1,000.
– After year 10, you’re making $2,358 in interest and your account is up nearly 160% to $25,937.
– After year 15, you’re earning 4-times your original interest and your account is worth $45,950.
– After year 20, your interest payment is $6,727 and you have more than $74,000 in principal.
– Thereafter, your account increases parabolic and as you let compounding work its magic over the years, the numbers start to get crazy.
Just notice: It took 9 years to double your interest payment and 8 years to double your account, but only 6 years to double it again. This is the power of compounding. If you simply took out the $1,000 per year in interest and spent it, your savings would never grow and your interest payment would remain at $1,000. After 20 years, you’d still be collecting $1,000 in interest instead of the $6,727 you would be receiving if you had let it compound.
Whether we are talking about a savings account, an investment account or individual stocks, the longer you can let your money compound, the more money you will make and the more your principal will be worth.
Sven Franssen