For those people looking to start the new year off by learning more about investing and planning for the future, there are some terms you should be familiar with. One of those terms is compound interest.

Compound interest has been called the eighth wonder of the world. Albert Einstein called it one of the greatest mathematical discoveries of all time. So what is compound interest and how can it help you?

When you save or invest, your money earns interest or appreciates. As time goes on, you earn interest not only on your original money, but also the interest you have earned up until that point. This is really a case of time = money.

Example: Two people decide to start investing. Both of them would like to retire when they turn 70. One is 20 years old, the other is 30 years old. They both have $1,000 to start with, and will add $1,000 a year, every year until retirement.

If they both get a 10% return on their money every year, the person who started investing at age 20 would have $1,397,690.23 at age 70. The person who waited until they were 30 to start investing would have $532,111.07. In this example, waiting 10 years to start investing cost nearly $900,000.

As you can see in the above example, the sooner you start investing the better. The key things to remember in order to harness the power of compounding interest.

  1. Start now… time is your friend.
  2. Invest what you can, when you can.
  3. Be patient and give your money time to grow.

If you want to see how much you should invest to get to your goal, check out this Financial Calculator.