Albert Einstein, who knew a lot about mathematics, would have said that the principle of compound interest was the greatest mathematical discovery of all time.
In any case, it is a fundamental investment strategy and one of the best ways to grow your money and become rich, taking advantage of what is commonly known as the “snowball effect” of interest. compounds.
Compound interest is the principle of investing a capital base and letting it work without affecting the interest earned.
There are two ways to earn interest on money:
The simple interest rate is a rate that applies only to capital (the amount of money initially invested). Interest earned is not added to the capital. You can withdraw and spend them at the end of each period (for example every year).
Compound interest is interest earned on interest. Instead of taking your interest earned each year, you let them add to the capital so that they in turn work to produce new interests (it is said that the interest is “capitalized”).
Over the long term, accumulated and reinvested interest has a major impact on investment growth as interest earned in each period is capitalized. The longer you stay in the market, the greater the expected effect of compound interest.
Compound interest is like a snowball rolling from the top of a snowy mountain. As she descends the slope, her height and speed grow. In the longest it continues its way, the more it grows and accelerates.
How to become rich? The key to success is to start early and let your money work
How compound interest works
If you put € 10,000 at 2%, you get € 200 in interest. If we withdraw these interests, then the following year there will be another 10 000 € on the booklet, which will bring 200 € again. In ten years, we will receive 10 × 200 € = € 2,000 of interest. These are simple interests.
But if you leave the interests on the booklet, they will in turn produce interest. These babies grow exponentially, like rabbits (I wanted to put like cockroaches to illustrate t, but it’s less cute). The second year there will be 10 200 € on the booklet, which will bring 204 € of interest. Instead of earning the same amount every year, interest will increase over time. In ten years, we will touch well … 2,200 €.
That’s just 10% more than simple interest. The latter yielded € 2,000, and the composition of interest € 200 more. We can think that it is nothing. False. Money placed for ten years at 2% yields certainly more than 20%, but not much more.
Perhaps we have not been patient enough. If we had waited twenty years, we would have received a total of € 4,860 in interest, 20% more than with simple interest (20 × € 200 = € 4,000). It’s better, but far from being a super power. The composition of interest has thus brought 860 €: the cherry is bigger, but it is still only the icing on the cake.
How to turn ordinary power into SUPER power
Children are told to be patient and be prepared to wait before spending their money. That way compound interest will pay even more. Well yes. Compound interest really only has value if we wait a long time (not just a few years) and if the interest rate is high. Few savers understand that the interest rate is essential. A low rate as on the livret A for a long time is a waste of time, so money.
If we put € 10,000 to 7% for twenty years, we will receive nearly € 29,000 in interest (we will have a total of € 39,000). In this case, the composition of interest brings in nearly € 15,000, a little more than simple interest (20 × € 700 = € 14,000). This is not the icing on the cake but a second cake.
Imagine now 10% over 30 years, you multiply by 18 your money, 10000 € become 180 000 € much better no?
At 10% over 40 years we have 452 000 €
If you have just 15% we do not have 50% more but well and good 5 times more 2 678 635 €
The secret is to invest regularly on high yield things (stocks, real estate, bonds, whatever).
How to obtain big returns?
By reading this blog, I will teach you to found investments over 10% return/year like this one and more and by using the leverage effect we can reach 15 or more.