by: colin mc caig
I'm sure you've heard this term used at least once or twice
And if you're like many people, you've maybe never thought about its true significance.
One person even went as far as to say that 'those who understood it, were certain to collect it, while those that didn't would be doomed to pay it'.
Many have even called it the 'eighth wonder of the world'...
Some time ago now, someone asked me a strange question. At first I thought it was another of those stupid trick questions but he begged me to hear him out.
It went something like this
If I were to give you the choice of working for 2000 dollars a day for the next 20 days, or 2 dollars a day for the next twenty days, but compounding that amount by double each day, which would you choose?
I confess I was a little perplexed.
I was certainly no maths whiz kid at high school. The first option, at a glance, seemed the more attractive of the two. I mean $40,000 is no mean sum, is it?
However, I didn't have a calculator handy, as I'm assuming you probably don't just now. So with a pen and a piece of paper, I allowed him to illustrate what would have happened had I opted for option 2 and compounded my 2 dollars
Day 1$2, Day 2£4, Day 3£8, Day 4$16, Day 5$32, Day 6$64, Day 7$128, Day 8$256, Day 9$512, Day 10$1024
At this stage, I admit, I was more than a little tempted to pull out. But he just smiled knowingly, so I held up my hands and let him scribble on
Day 11$2048, Day 12$4096, Day 13$8192, Day 14$16,384 Day 15$32, 768, Day 16$65,536, Day 17$131,072, Day 18£262,144, Day 19$524,288, Day 20$10485,76
Wow, i had just been turned on to the magic of Compound Interest!
By just hanging tight those 10 extra days, I would have been sitting on a million!
So what's my point here exactly?
Well let's go back to start of the story...
It's a pretty well known fact that one of the main reasons the wealthy of this world got where they are today is because they understand this simple principle of compound returns
By allowing interest to accumulate on interest, they've managed to build up small fortunes!
So what about the flip side of the coin?
Well, the chances are that if you know little or nothing about Compound Interest, it's very possible you've got it working against you.
By that I mean that if you have loans and credit card debts of any kind and you're only making the minimum monthly repayments on those debts, then you're becoming gradually poorer.
Think Im exaggerating? Well, here's a fact for you
Let's imagine you had a 1000-dollar card balance charging 18% interest. With minimum payments you could be nearly 20 years paying that off!
And that's before the bank (as they're fond of doing) offers to up your limit.
In other words, in sharp contrast to the earlier example, you're paying interest on top of interest and becoming slowly insolvent...
So how do you turn the situation around?
Well, I know it may seem like stating the obvious, but if you're spending more than you earn, it's essential you start earning more than you spend.
This will mean getting rid of some of those credit cards. By all means, keep one for emergencies (preferably a low interest rate one). But do get rid of any store or gold credit cards.
Why?
Because they encourage you to buy junk you don't need at ludicrous rates of interest!
But the moral of the story and most important for you is that if you've been allowing compound interest to work against you all this time, then as sure as night follows day, you can start getting it to work for you.
You've probably heard the old Chinese saying, 'The journey of a thousand miles starts with one step'.
Yes, I know that initial little money saved won't seem a great deal, but did the interest really seem a lot when you took on your first loan or credit card?
Those little sums quickly snowball into bigger ones.
So have a think today how you can start getting Compound Interest on your side...
...and, slowly but surely, you'll begin to take a firmer hold on your financial future.