It is no wonder that compound interest has been referred to as the Eighth Wonder of the World. Over time, just an incremental increase in your rate of return can have a magnificent impact on the value of your savings. Compound interest may not be the Great Pyramid of Giza, but it could be as close as you will get in the world of investing.
What is compound interest?
Compound interest can be thought of as “interest on interest.” It’s the accumulation of previous returns or interest added on to the initial (principal) investment. Essentially, it can allow your wealth to snowball because every gain is added on to your initial investment to potentially create larger returns in the future.
How can you make compound interest work for you?
By investing early, you’re likely to reach your same financial goals and needs with far less money than you’d need to utilize later in life.
Here’s a hypothetical example:
There’s Investor A, who invests $10,000 per year only from ages 25 to 35 (10 years).
Investor B, on the other hand, also invests $10,000 per year, but it’s from ages 35 to 65 (30 years).
It might seem like Investor B, who contributed far more money for an additional two decades, would have more wealth. However, thanks to compound interest, Investor A would not only end up with more wealth in the end, but would have to invest far less money to reach their final amount (assuming that both investors got the same returns).
The lesson for investors: by starting early, you have the chance to make your wealth work harder for you, instead of working harder to contribute more of your wealth later.
Want to start making compound interest work for you?
At LexION Capital, our long-term investment strategies can help you start harnessing the power of compound interest today. Whether it’s planning for retirement or just growing your wealth, we can work with you to craft a unique investment portfolio that will effectively meet your goals over time. Don’t hesitate to have a conversation with us today to get started.
