Apart from winning the lottery, compound interest can slowly transform your small investment account into large fortunes over time. Some people have all the luck to win 4D or Toto (Singapore's versions of lottery). Before I ever get lucky, the power of compound interest will be my best friend.
Just the other day, I was reading an article from Business Insider about Warren Buffett titled "17 Facts about Warren Buffett and his wealth that will blow your mind (by: Elena Holodny, dated 14 August 2014)".
I will list the top few facts that caught my attention:
1. 99% of Buffett's wealth was earned after his 50th birthday.
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5. In 2014, Buffett made on average S37 million per day - that's more than what Jennifer Lawrence made the entire year.
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13. If you have invested $1,000 in Berkshire Hathaway in 1970, you'd have $4.86 million today.
14. If you have invested $1,000 in Berkshire Hathaway in 1980, you'd have $531,165 today.
15. If you have invested $1,000 in Berkshire Hathaway in 1990, you'd have $28,785 today.
16. If you have invested $1,000 in Berkshire Hathaway in 2000, you'd have $2,218 today.
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For the rest of the interesting facts, please read the article.
The article, not only states how rich Warren Buffett is, but indirectly points out how compound interest builds wealth over time (See fact 13-16). The rate of return definitely has an impact on how fast your investment grows as well. However, in all common sense, the earlier an investor begins, the more wealth he or she will accumulate.
Rule of 72
The Rule of 72 is very simple. Most of you have probably heard about this rule. To determine how many years it will take an investment to double in value, simply divide 72 by the annual rate of return. For example, an investment that returns 5% annually doubles every 14.4 years (72/5 = 14.4). Similarly, an investment that returns 8% annually doubles every 9 years (72/8 = 9).
The Magic in Compounding - A Hypothetical Scenario
At age 30, Ali invests S$5,000 annually in "I-will-earn-you-8%-annually" fund for 10 years and stops investing. His total investment is S$50,000.
Muthu, at age 40, invests S$5,000 annually in the same "I-will-earn-you-8%-annually" fund for 30 years. His total investment is S$150,000.
Finally, at age 70, both Ali and Muthu decided to use their investment fund to enjoy their retirement. Ali's fund will be worth S$787,176 (after investing S$50,000) and Muthu's fund will be worth S$611,729 (after investing S$150,000). By starting 10 years earlier and making one third of the investment, Ali ends up with more.
Start Early
Leverage your time (by starting early) to make the power of compounding work for you.
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