I was talking to a friend and she said she does not believe in savings & investment. She argued that she will rather put her whole money into a business and get her returns. She went further to say that the future will take care of itself and she went all religious.
I told her all she needed to build her retirement/ kids college educational account was a few years of continuous savings. I shared a simple compound interest calculation with her and she was amazed. Compound interest is simply interest on interest. According to Wikipedia, Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding.This makes the principal to grow at a faster rate than a simple interest.
One thing about savings and investment is that it is never too early to start and it is never too late to start. Lets look at 2 scenario of 2 different investors that both started working at age 24.
Investor A starts saving and investing N200,000 yearly at the rate of 8% immediately he started working. He consistently saves N200,000 each year for the next 8 years and stops. His investment however keeps running at a compounding interest for the next 19 years.
Investor B is a spend thrift and does not see the need to start saving and investing. He realizes at the age of 32, that he has to start planning for his future. He saves N200,000 each year at the rate of 8% for the next 19 years.
They both decide to retire at the age 50 having worked for 27 years. Who do you think will have more money in their investment account at the end of the 27 years?
|Years||Age||Investor A||Investor B|
Are you shocked at the result? Investor A’s investment account balance is higher than that of Investor’s B by N962,000.
This shows us the power of compound interest. The trick is to start saving and investing early. With just a little discipline, we can all achieve financial freedom.