The Magic of Compound Interest

according to popular belief the brilliant albert einstein once said compound interest is the eight wonder of the world he who understands it earns it he who doesn't pays it we couldn't find actual proof that he said that but it doesn't change the fact that compound interest is an incredibly powerful tool hi my name is alex nanjoy and today i'll show you why it's important to understand compound interest so that you can use it to your advantage [Music] whether einstein said it or not understanding how compound interest works is essential for making the most out of your investments to understand the concept let's look at a simple example with round numbers let's say you invest a thousand dollars today and earn an annual return of 10 that means you will have one thousand one hundred dollars at the end of the year at that point you have two options you can either a withdraw the hundred dollars you earned or b leave your under dollar invested if you earn another 10 on your investments in the second year here's how both options compare at the end of year two with option a you withdraw again so you end up with your original thousand dollars plus the two one hundred dollar bills you now keep under your mattress so you have one thousand two hundred dollars in total option b on the other hand since in this option you left your money invested again your investment account has the original thousand dollars plus the hundred dollars you earned in the first year and the hundred and ten dollars you're in the second year so it's one thousand two hundred and ten dollars in total that extra ten dollars is the compound interest it's money earned on money earned so in other words your money works for you so to truly understand the magic let's look at the real life example here's sarah and george they both enter the workforce at 22 years old they both get the same job so they earn the exact same salary throughout their lifetimes george doesn't invest anything for the first 10 years 10 years later at 32 years old he slows down his spending and starts to invest 6 000 per year he does so for 34 years until his retirement at 65 years old he earns a respectable 8 return on his investments during this time in total it's 204 000 that he invested sarah on the other hand started saving right away at 22 years old putting away the same amount of thousand dollars per year as george but unlike george sarah starts investing right away and stops investing after 10 years after those first 10 years she never invested another dime until she retires at 65 just like george since they were both with the same advisor she also earned an eight percent return so in total sarah earned eight percent return annually on investments of sixty thousand dollars compared to the total of two hundred and four thousand dollars of george so at age 22 sauron invested six thousand dollars a year for ten years for a total of sixty thousand dollars at age 32 george also invested six thousand dollars a year but for 34 years for a total of again 204 thousand who do you think was the wealthiest of the two at 65 years old i almost gave the answer away but let's see georgia's investment grew to about a million dollars sarah ended up with close to 1.3 million dollars that's three hundred thousand dollars more than george while investing three to four times less money than him the important thing to remember is to start investing early to take advantage of compound interest and reap the benefits later on thanks for watching for more investing tips visit our website at clara.ca and don't forget to hit the subscribe [Music] button [Music] you

Channel: Claret Asset Management

Views: 7,800

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Id: 4eYP7V7mlm4

Length: 3min 56sec (236 seconds)

Published: Tue Jul 20 2021