The Beauty of Compound Interest

"Compound interest is the 8th Wonder of the World" - Albert Einstein

Albert Einstein called compound interest the greatest mathematical discovery of all time. The wonder of compounding transforms your working money into state-of-the art, highly powerful income generating tool. It is the process of generating earnings on an asset's reinvested earnings. It is generally used in one of two ways: To figure out how long it will take to double your money in a savings or investments, or how long it will be before your current stash of cash loses half its real purchasing power.

In other words, it's interest earning interest. For example you invested P1,000 a year ago. It earned P100 in interest last year. This year you will be earning interest on P1,100 (original investment+interest earned). The video below from Pesos and Sense explains Compound Interest:

Important Pointers About 

Compound Interest

(An excerpt from G.Foreman)

Anyone can benefit from it 

You don't have to be a genius. Almost any investment will earn compound interest if you leave earnings in the account. Just remember to invest your hard earned money to an investment vehicle that can beat inflation.

Compound interest is a double-edged sword 

It's great if you save or invest regularly, but it can be cruel if you are borrowing money.

Time is on your side 

The longer money compounds, the faster it grows. Money growing 6% per year will double in about 12 years, but it will be worth four times as much as in 24 years.

Time is not on your side

CREDIT CARDS and other open-ended accounts use compound interest against you. That's the reason why "minimum payments" are likely to keep you in debt forever. 

You don't have to be rich to make compound interest work for you The principal works the same whether you invested P1,000, P10,000, P100,000 or P1,000,000. The millionaire may have more investment options, but even the poorest among us can use compound interest to reduce the amount we pay credit-card companies and payday lenders. 

Compound interest requires you to sacrifice today to reap a benefit tomorrow You can choose to improve your lifestyle as you age instead of feeling like you are always making sacrifices by downgrading your lifestyle as your obligation increase. Too many people spending their younger years living large, only to be forced to downgrade as they age and start a family. If you save early, you won't be used to a larger lifestyle in the first place and due to your out-sized savings, you can choose to upgrade your lifestyle as you fit.

Saving a few pesos a month might not seem like much, but if done consistently it could make a BIG difference in your financial future. Understanding these simple facts can have a major impact on your financial success.