Compound interest is simply when interest is added to the investment principal so that from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.
To compound successfully you need time to allow the power of compounding to work for you.
Let’s look at an example. Sam invested $10,000 into a fixed interest investment that paid 15% per annum over a 15 year period. He has the choice of having the $1500 annual interest income paid into his savings, or re-investing back into the investment account.
Simply by re-investing his interest, and making use of the power of compounding, Sam will come out ahead by approximately $48,900. Put another way, if he had chosen to have his interest paid out annually, his investment worth would have tripled after 15 yrs. By reinvesting his interest returns, he would multiply it 8 times!
These estimates are for illustrative purposes only but are aimed at illustrating 2 main principles. Firstly, the powerful benefits compounding your returns can provide you with and secondly, the earlier you start (that is, the longer the investment timeframe) the greater these benefits will be.
PGFS can tailor an effective investment strategy that will harness the benefits of compounding returns as part of your wealth creation plans.