Ever thought of growing your funds with minimal effort? Compound interest is a powerful tool that could help you reach your financial goals effortlessly if you put your money to work for you. The power of compound interest helps to grow your wealth exponentially over time. However, it is a blessing to the lender or investor and a bane to the borrower.
According to Albert Einstein, the principle of compounding is the most powerful force in the universe, and “he who understands it earns it”. Compounding is an incredibly important and strong force in the financial world. However, with debts, it could work to your disadvantage. The formula to grow your wealth is, therefore, to avoid debt and save/invest your money as much as possible.
Compound Interest
In simple terms, compound interest is earning ‘interest on interest’ and this can cause your wealth to grow rapidly over time. It earns more than just simple interest, which does not accumulate on already earned interest.
With compound interest, you earn interest not only on your principal but also on the interest earned on your investment. This is how your wealth grows exponentially.
Factors That Determine The Returns Of Compound Interest
There are three factors that determine your compound interest returns and influence its compounding rate:
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The Amount
The more money you put to work for you, the more dividends your funds will earn. At Overwood, we pay daily dividends to all our investors on our platform, according to the value of their investment. Find out more here.
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The Interest Rate
This is the profit you earn on your investment. The higher the return on your investment, the faster your money will grow. At Overwood, we offer compound interest rates of 8-15% per annum on money invested. Invest with Overwood.
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The Length of Investment
The longer you leave your money to work for you, the more it will compound and grow. This is such a significant part of any investment and earlier investments could yield much more than later investments, even though the later investments have larger principals.
Why should you start now?
Compound interest exponentially grows your money with time. The sooner you start investing, the more your funds will earn overtime.
Here is an example;
Sam and Jim are 20 years old. Jim starts investing at the age of 20. He invested NGN50,000/month at an interest rate of 10% per annum, for twenty (20) years and then stopped. Sam, however, did not start investing until he was 30 years. He invested NGN50,000 every month for forty (40) years, earning an interest rate of 10% per annum.
| Sam | Jim | |
| 20 years | NGN0 | NGN630,934.69 |
| 30 years | NGN630,934.69 | NGN10,307,457.33 |
| 40 years | NGN10,307,457.33 | NGN38,322,194.08 |
| 50 years | NGN38,322,194.08 | NGN104,156,257.44 |
| 60 years | NGN114,463,714.77 | NGN283,087,287.27 |
| 70 years | NGN321,409,481.36 | NGN769,405,642.85 |
| Total amount invested | NGN24,000,000 | NGN12,000,000 |
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Jim utilized the power of compound interest in growing his money by starting early. However, Jim didn’t and by postponing his investment, his opportunity cost grew.
Opportunity cost is the benefit missed when an action is not taken—in this case, the amount of money you lose by not investing early. By not investing in the same year as Jim, Sam lost the opportunity to earn NGN630,934.69 in the first ten years, and NGN447,996,161.49 at the age of 70.
Compound interest is the most powerful but most underestimated phenomenon in the financial market. With it, anyone who invests regularly can reach their financial goals faster.
The best thing about compounding is that it gets more powerful every year and your funds earn more returns over time. If you keep at it, your money will grow exponentially over the years.
Are you curious about how much funds can earn over time with the power of compound interest? Use our compound interest calculator to find out here.