Compound Interest is Bae!

Albert Einstein was not wrong when he stated, compound interest is the eighth wonder of the world, those who understand it, earn it and those who don’t, pay it. As an investor, compound interest is your best friend. It will make your money grow at a faster rate. Who doesn’t like that?

For those wondering what compound interest is, Compound interest is when your money not only earns a return on your principal but the return also earns a return. Basically you earn interest on interest. Compound interest has an effect like that of a snowball at the top of a hill. It starts slowly, but once the snowball gains momentum as it goes down the hill, there is no stopping.

The trick is that at the beginning of your investing journey, nothing much happens and you as the investor will need to put effort to grow your investment i.e. consistently investing and being patient. It will be your own effort to push the snowball down the hill for it to gain momentum. But once it does, compound interest will do rest of the hard work for you.

For example, if you start saving  Kshs 5,000 per month in an account/investment earning 10% per year for your child’s university fees when they are born. After 5 years, you will have accumulated approximately Kshs 500,000. Even if you don’t contribute another cent after they are 5 years old, the value of your money will be Kshs 1,200,000 by the time they are 15 years old and approx. Kshs 2,100,000 when they are 20 years old. You only contributed a total of Kshs 300,000 but have more than Kshs 2,100,000 when you need to take your child to university. You have earned Kshs 1,800,000  thanks to compound interest. Your child won’t have to take student loans.

Unfortunately, the mistake most of us do, is that we are not patient enough. We want instantaneous results. We want to see the compound effect on year one or two of investment hence we end up pulling out our investments before we can witness the magic compound interest is. On the other hand, some of us take out the interest we earn at the end of every period hence we miss out on the compounding effect leaving us at the same position we started.

Lastly, time is your greatest friend when it comes to Compound interest. The sooner you begin, the better it will be for you. However don’t forget that the amount you invest and the return on your investment also play a huge role.  The more you invest and the higher the rate of return, the faster your money will grow.

So start saving now and as much as you can, and invest it well because the sooner you get the wonder of compounding working for you, the sooner you’ll reach your financial dreams.

PS. None of this content is financial or investment advice. It’s for educational purposes only. Please do your own research and/or consult with a professional if you want advice customized to your specific situation.