[Finance Wiz @Daniel] Why the Compound Interest Effect is the World’s Eighth Wonder
FINANCE2021-10-08
5 Mins Read
They say life is a race, but some people are winning it at the starting line. While some children are able to go to international school or study abroad at an early age, enrol in numerous interest classes or, even, are chauffeured to the campus in luxury sedans, many of us couldn’t help but wonder: “Why am I not born with a silver spoon?” What if you may be able to forge your family’s own silver spoon? You are in the position to make up the wealth gap for your next generation or even theirs, and give them what they need for a future unlimited.
Albert Einstein once said: “Compound interest is the world’s eighth wonder.”1 Make good use of your assets today and make long-term investments - starting with even a small capital – it can become a considerable fortune for your offspring.
Patience accomplish the magic of compound interest
Put it simply, the compound interest effect is to reinvest the interest together with the principal. Repeatedly, your wealth grows like a down-rolling snowball.
“Produce money with money”, simple as it sounds; many people lost patience mid-way as they don’t see great returns in a short time.
Take a simple example. With $10,000 as your initial principal with an annual rate of return of 5%, you get $15,000 in a decade on a simple interest investment and $16,289 on compound interest. You may think that the difference of about $1,200 isn’t so impressive for ten years.
To widen the time frame, in 50 years, your return grows to only $35,000 on simple interest, but on the compound, as much as $114,674. Without extra effort, the two investments differ by three times; in a century, the total return is just $60,000 on simple interest, but grows more than a hundred-fold to as much as $1,315,013 on compound!
This “extra” return enables you to place your descendants ahead of the game.
Time is the key to accumulate wealth
The compound interest effect is the crucial strategy to roll up wealth in a “low-profile” way. It is simply tempting to try to become rich over night when we sees swings in the stock market everyday. Selling and buying between short-term peaks and troughs could get you some patty cash, but with such “impatient” tactics, you would very likely to miss out on the power of compound interest.
We are no sages, and it is certainly not easy to grasp every up and down and make the right investment decisions in the long run. Worse, the economy and the markets have become more unpredictable than ever. It becomes very questionable whether one can easily earn an endowment with speculation. Under such background, some savings insurance products that maximise the compound interest effect may be a more reliable choice.
There are also savings insurance plans with promising growth potential. You can immerse yourself in the power of compound interest in the long term with a small capital and a very short premium payment term, potentially doubling up your wealth every decade and allowing you to pass on a legacy to the next generation, and the next!
Source:
1. The Breeze： https://www.breezejmu.org/business/compound-interest-the-eighth-wonder-of-the-world/article_11a24ebe-9e77-11eb-ba00-33aaec328747.html
The above content is reviewed by Mr Daniel Lau - Head of Investment Proposition of AXA Hong Kong and Macau
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