## Monday, May 12, 2008

### START SAVING EARLY: COMPOUND INTEREST

I'm sure you know that when you keep your money in the bank, it pays you interest.

But did you know that the longer you keep it there, the greater the magic of Compound Interest?

WHAT IS COMPOUND INTEREST?

Let's say your grandparents gave you \$10,000 at the age of 10, and you put it into your savings account. The bank's interest rate rate is 3% per year. And it remains at 3% over the next three years.

Year 1:
The first year, you'll earn \$300, or 3% on your \$1000.
So the total in your savings account is now \$10300, without any effort on your part!

Year 2:
Leave your money (including the interest) in the bank for another year at 3% interest, and you'll be earning interest not just on your initial deposit of \$10,000, but also on the \$300 interest that you earned at the end of the first year, ie, you'll be getting interest on \$10,300.
Remember: Compound interest is interest on your interest.
At the end of 2 years, the total in your account is now \$10,609.

Year 3:
And that's not all. The longer you keep the money in the bank, the more compound interest works in your favour. Leave the money and the accumulated interest in the bank yet another year, and you'll be earning interest on the accumulated total of \$10609, 3% of \$10609 = \$318.27.
So at the end of 3 years, you will have \$10,927.27.

At the end of 10 years, you'll have\$ 13,439.16
At the end of 20 years, you'll have \$ 18061.11
At the end of 30 years, you'll have \$ 24,272.62

As you can see, the longer you leave the money and the accumulated interest in the bank, the faster your money grows. In other words, the earlier you start saving, the more you can make your money work for you!

COOL TIP -- THE RULE OF 72. There's an easy way to estimate how long it will take you to double your money if you put it into a bank and let compound interest work for you, at a particular interest rate. Very simply: Divide 72 by the interest rate you expect to earn. For example, say you expect the interest rate to be 3%. 72 divided by 3 is 24. That means that it will take you 24 years to double your money.