Compound interest is the process of earning interest not only on the initial amount you invest but also on the interest accumulated over time. In other words, it’s interest on interest, and this effect of building on itself is what makes it so powerful.
Example:
You invested $100,000 in an investment and that investment returns you 7% per year, or $7,000 in dollar terms.
After 1 year, you would have $107,000
After 2 years, you would have $114,490
After 3 years, you would have $131,080
After 10 years you would have $196,715
Let us recap that. You have made $96,715 in 10 years, by not working any harder or taking time away from doing the things you enjoy. This is the magic of compound interest.
In order to benefit from compound interest you need to:
- Be patient.
- Take risk.
- Manage that risk well, often by taking a long term view, usually 5+ years.
- Not let your emotions make decisions.
As you would have realised, all the above are part of the mindset of a person. Thus one can start becoming a successful investor and benefit from compound interest by having these 4 mindsets.
