The 8th Wonder Of The World

The magnificent 8th wonder of the world.

This marvellous wonder has been a secret and a mystery to many people throughout time.

Luckily in our technological age we now have the ability to discover anything we wish at the click of a button!

What is this wonder? How can it be so great?

The 8th wonder of the world is compound interest.

But seriously, what makes it so great?

Compound interest is basically like a snowball in that the more you continue to add to something, the more it naturally adds onto itself.

Let's look at a savings account with a starting balance of $5,000, an interest rate of 5% and at the end of each month we save an extra $1,000. For the first month you'll earn interest on the $5,000. In the next month you'll earn interest on the $6,000 as well as the interest you accrued for the first month. 

After the first year you would have earned $534.66 just in interest alone, after the second year it would be $1,710.63 and the third year it is now $3,560.70. 

Now just be mindful that compound interest can also work against us, most credit cards and significant debt tend to follow the same principle. So if you have a $25,000 debt and you're charged $500 in interest payments, the next month you'll be charged interest on $25,500 unless you start paying down your debt.

I know, there's a lot of numbers involved but in a nutshell, compound interest is the compounding effect for every decision we make, pay down debt asap, put your savings in a compounding interest savings account (not all savings accounts are made equal) and practice discipline in not dipping into your account as much as possible.

I've added a link below to a savings calculator so you can have a play with amounts and interest rates.

Posted 02 May 2020