Ask Cara – Snowball?
‘I want to start investing some of my savings, I am embarrassed it might be too little. Should I wait until I have saved more and invest later?’
What is compound interest?
I get this question a lot and my answer is no. The reason, compound interest. Compound interest can be a tricky concept to understand. It has been said that he or she who understand it, earns it. And he or she who doesn’t, pays it.
So let’s understand it! Earning compound interest is like making a snowman. To make a snowman, you tend to start with a small ball and, as you roll it, it grows. As the surface area increases, it collects more and more snow increasing the ball at a quicker rate.
Some of you might have heard of the ‘Rule of 72’. This rule is used to indicate how quickly your money can double. For example, if your investment can earn a 7% return per year, 72 divide by 7, is roughly 10. Therefore, the rule would suggest you can double your money every 10 years.
Let’s look at an example. If you start your investment snowball at 25, you could double your money by age 35. By 45, according to the rule, your money will double again from what you had in the pot at age 35, increasing your initial investment fourfold. Every time the pot grows and doubles, it is growing, collecting more snow at a quicker rate.
Such is the magic of compound growth and the earlier you get the ball rolling, the better!
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