The Most Powerful Force On Earth… Is It Working For You?
by Dave Mauder
Albert Einstein was once asked what he considered to be the greatest force in the universe.
Knowing a thing or two about numbers, Einstein replied that Compound Interest was not only man’s greatest invention, but it was also the most powerful force on Earth!
Those are compelling words coming from one of the most intelligent men of our times!
Many people feel that compounding interest is just a bunch of complicated financial mumbo-jumbo, but in reality, it is a simple concept that can pay off very big.
In fact, it’s one of the few ways you can ever get your money to work harder than you do.
The principle of compounding interest applies to any kind of return, or money earned by an investment, such as dividends paid by a mutual fund.
Consider this example:
Starting at 20-years old, you invest $50 per month for 45-years at 10% interest… You’ll end up with $454,367 — and you only paid $27,000 out of your own pocket!
Compounding refers to the growth of an investment from reinvesting any money that is earned. That way, your investment earns a return based on the money you put in, AND on any returns already earned on that money.
In other words, you get paid interest on the interest! Of course, depending on the investment vehicle you choose, your principal is not guaranteed, and the value may go up or down.
To give another example, let’s say you put $1,000 in an investment that is earning 10% a year. You will earn $100 the first year, bringing your account to $1,100. If you reinvest the interest, you will have $1,100 invested the second year, and interest will be paid on the $1,100, rather than just the original $1,000.
So now, the interest you earn the second year will be $110 instead of $100 (10% of $1,100 is $110), and your total investment at the end of the second year would be $1,210. This continues throughout the life of your investment, and believe me, it adds up FAST!
If you choose not to reinvest your earnings, you earn what is called “simple interest”.
That means that you are paid a return only on the amount of your initial investment. If you earn simple interest of 10% a year, it will take 10 years for your investment to double. However, with the same interest rate compounded, your investment will double in 7.2 years!
Quite a difference!
Use the Rule of 72 to figure out how quickly your investment will double:
The Rule of 72 — Simply divide the number 72 by the rate of return you are currently earning. The answer is the number of years it will take your investment to double in value. For example, if your investment is earning an 8% return, it will double in 9 years (72 divided by 8 = 9).
Remember, the Rule of 72 only works with compounding interest and only when you don’t dip into the funds in your account.
Compounding is especially valuable for long-term investments.
If you consider the example of the 20-year old mentioned earlier, it takes only $50 per month at 10% to amass over $450,000 by age 65. In contrast, if you waited until age 45 to begin investing, you would have to save $313 a month at 10% to accumulate the same amount.
It goes without saying, people who start early can begin with a relatively small amount of money and have a very nice nest egg for retirement.
In other words, stop making excuses, and start investing!
I have a several friends my age who tell me they want to start an investment plan, but “things” keep coming up. They swear they’ll get started as soon as things “settle down”.
Believe me — “things” never settle down. It’s called LIFE my friends! 
The longer you wait, the less likely you are to ever start saving for your future.
The longer you put it off, the more you’ll have to save, so it ultimately never happens.
I used to have a very close neighbor who is in his late 40’s now, and has never saved anything for his retirement. He asked me the other day where he could invest some money to double it fast.
Unfortunately, I didn’t have an answer for him unless he was also willing to lose the money.
Now, he’s wishing he would have started investing a few dollars a month when he was my age…
Don’t let yourself fall into this trap. And if you know of any family members, friends, or close neighbors in the same predicament, give them a copy of this article.
Maybe it will help spur them to action.
So, what are you waiting for?
Get started on your investment plan NOW!
If you really have no idea where to start, Charles Schwab is a great place. Visit http://www.schwab.com and request a new investor packet to be mailed to you.
You can open a Schwab One account and begin investing a small amount each month in some no-load mutual funds. Schwab offers thousands of mutual funds in their OneSource listing with no loads and no fees. Schwab can also help you get started with an IRA account if you don’t already have one.
Please understand, this isn’t an advertisement for Schwab.
I simply have all my investment accounts with Schwab, and have been very happy with their services. The best part is that I have instant access to my accounts through the Internet, and I can also move money around and place trades right online.
However, Schwab isn’t the only choice.
Check with some reputable brokers and investment firms in your area. They will be able to answer your questions and help you get started.
Better yet, if you have any friends or family members who are already investing and doing well, ask them for a recommendation.
Enjoy Your Success!
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