Home  > Saving: The Magic of Compound Interest
 Share  Print Version  Email

Saving: The Magic of Compound Interest

Provided by the International Finance Corporation


Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest.  In short, you make money from your money.  Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  In fact, Albert Einstein once was purported to have stated,“The most powerful force in the universe is compound interest.”  The below three examples will illustrated the power of compound interest.

Example #1

By instilling the saving habit early in life, even the goal of becoming a millionaire by the age of sixty-five can be reached. By starting at the age of twenty and saving TT$95 per month, you can end up with a million dollars by the age of sixty-five, assuming a 10 percent return on the money (tax deferred). This is also assuming that none of the money will be withdrawn during the waiting period.

This goal also can be reached if you wait until you are older to start saving, but the amount you must contribute monthly increases dramatically the longer you wait. For example, if you wait until you are thirty years old, you will need to save TT$263 a month. If you wait until you are forty years old, you will need to save TT$754 a month, and if you wait until you are fifty years old, you will need to save TT$2,413 a month.  The below chart also shows how you can reach the TT$1 million goal by age 65 if you prefer to make a one-time investment, monthly investment or annual investment at various ages.

Age

One-time Investment

Monthly Investment

Annual Investment

20

TT$13,719

TT$95

TT$1,391

25

TT$22,095

TT$158

TT$2,259

30

TT$35,584

TT$263

TT$3,690

35

TT$57,309

TT$442

TT$6,079

40

TT$92,296

TT$754

TT$10,168

45

TT$148,644

TT$1,317

TT$17,460

50

TT$239,392

TT$2,413

TT$31,474

55

TT$385,543

TT$4,882

TT$62,745

60

TT$620,921

TT$12,914

TT$163,797

Example #2

This table illustrates the value over time of TT$1,000 invested annually (only TT$84 a month):

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

TT$5,526

TT$12,578

TT$21,579

TT$33,066

6%

TT$5,637

TT$13,181

TT$23,276

TT$36,786

7%

TT$5,751

TT$13,816

TT$25,129

TT$40,995

8%

TT$5,867

TT$14,487

TT$27,152

TT$45,762

9%

TT$5,985

TT$15,193

TT$29,361

TT$51,160

10%

TT$6,105

TT$15,937

TT$31,772

TT$57,275

11%

TT$6,228

TT$16,722

TT$34,405

TT$64,203

12%

TT$6,353

TT$17,549

TT$37,280

TT$72,052

Example #3

Investing TT$10,000 in a one-time lump sum also pays off:

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

TT$12,763

TT$16,289

TT$20,789

TT$26,533

6%

TT$13,382

TT$17,908

TT$23,966

TT$32,071

7%

TT$14,026

TT$19,672

TT$27,590

TT$38,697

8%

TT$14,693

TT$21,589

TT$31,722

TT$46,610

9%

TT$15,386

TT$23,674

TT$36,425

TT$56,044

10%

TT$16,105

TT$25,937

TT$41,772

TT$67,275

11%

TT$16,851

TT$28,394

TT$47,772

TT$80,623

12%

TT$17,623

TT$31,058

TT$54,736

TT$96,463

Copyright © 2000 - 2016, International Finance Corporation. All Rights Reserved.

 Share  Print Version  Email
Comments &Ratings (0)
If you are a human, do not fill in this field.
Click stars to rate.
   Comments are truncated at 1000 characters