The Power of Compound Interest(Part II)

Labels: , , Posted by Benedict on Thursday, December 20, 2007 at 6:55 AM

In my last post about the power of compound interest, I said that learning its power will make us realize that we should start saving now, or if not now, at least as soon as we can. I also gave you an example about the difference between simple and compound interest. And that, compound interest can give you higher return by reinvesting your earned interest to earn more interest. In this post, I would like to give you another two short examples that will show you why we should start saving now.


Example 1: Who will have more money at age 65?

Let's say at age 25 you start saving P25,000 annually for 8 years at 8% interest rate p.a.(compounding). And after that 8 years, you stop saving P25,000 and you just let your money in your account earn interest.

On the other hand, your friend starts saving P25,000 annually at 8% interest rate p.a(compounding) but starts at age 35 and saves for 30 years(up to age 65). Who do you think will have more money at age 65? You or your friend? The answer? You. At age 65, you will have a total amount of P3,913,873.52 while your friend will only have P3,310,213.12! You only save P25,000 annually for 8 years and you just let it earn interest while your friend saves P25,000 annually for 30 years! See the importance and advantage of starting early?

Example 2: What will you choose?

A: Instant $100,000 or

B: $0.01 that doubles everyday for 1 month?

$0.01 doubled everyday for 1 month = $10,737,418.24

 

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