Do you know what’s the most powerful force in the Universe?
Is it a volcano eruption? Tsunami waves? Or nuclear energy?
According to Albert Einstein, the most powerful force in the Universe is compound interest.
What is compound interest?
Compound interest is the situation where interest is added to the principal so that interest can be earned from the interest (and principal) from that moment onwards.
For example, on 1 Jan 2008, you invested RM10,000 in a fixed deposit with Bank XYZ at the interest rate of RM3.7% per annum.
Then, by 1 Jan 2009, you will have RM10,370 ((3.7% x RM10,000) + RM10,000) in your account.
By using this principle, you reinvest the RM10,370 so that the interest of RM370 will also earn interest by the next year.
Using the same example, by 1 Jan 2010, you will have RM10753.69 ((3.7% x RM10,370) + RM10,370) in your account.
Here is a sample of the calculation with an initial investment of RM10,000 invested at an interest rate of 3.7% per annum for 20 years.
Based on the calculations above, after 19 years, you will double your initial investment.
Important factors affecting compound interest
Other than the number of years, another important point is the interest rate.
From the calculator above, with an interest rate of 10% per annum instead of 3.7% per annum, the total future value dramatically increases to RM67,275.
That is 6 times the initial investment of RM10,000!
Amazing, right?
So, from the example above, it is of utmost importance to invest with the right investment vehicle. With the hope that we can grow our initial investment to the highest level.
Among the investment vehicles which has the potential to generate a higher return on investment are cryptocurrency, unit trust, robo-advisor and stocks.
Aside from the above, it is also wise to not cash out or spend the interest generated from your initial investment.
Because it will help you to reach your financial goal faster.
Final thoughts
In summary, compound interest is indeed a powerful force in the Universe.
And now, let’s plan how to fully utilize what we have by using the principle behind this powerful force.
