The miracle of compound interest and why to invest now

Feel free to reach out to PSG Wealth adviser Tunin Roy directly.

The concept of earning interest on your interest is the miracle of compounding. Compound interest is the key to building long-term wealth and has been described as the eighth wonder of the world. The miracle of compound interest is a powerful financial concept that highlights the exponential growth of wealth over time. Compound interest occurs when the interest earned on an investment or savings is added to the principal amount, and subsequent interest calculations are based on this new, higher total. This compounding effect accelerates the growth of the investment, creating a snowball effect.

The term “compound interest” is often attributed to the  17^th century genius, Sir Isaac Newton. However, it is essential to note that Newton did not explicitly use the term in the context of finance. The concept of compound interest has roots in ancient financial practices, with some attributing its early understanding to the Italian mathematician Leonardo Fibonacci.

Regardless of its historical origins, compound interest is a fundamental principle in modern finance, illustrating the importance of time in building wealth. The longer the money is allowed to compound, the more significant its impact on the overall growth of an investment. This concept underscores the value of starting to invest early, as it maximises the time available for compound interest to work its financial magic.

Compound interest grows your money in a savings account, term deposits, or bonds. However, the same principles – and the same compound interest formula – apply to any investment if you reinvest your profits. This is the key to building wealth over time. Compounding interest is brilliant if you’re the person earning interest, but not if you’re the one paying it. A credit card or loan can easily spiral out of control if you don’t keep up with repayments. This principle shows why delaying expenditure in the near future and investing now means that you can have so much more in the future.

Starting now also enables you to weather market fluctuations and volatility, taking advantage of the resilience of a diversified portfolio. While markets may experience short-term fluctuations, history demonstrates that, over the long term, they tend to appreciate. By initiating your investment journey promptly, you position yourself to ride out market cycles and harness the upward trajectory of the market.

Moreover, early investing cultivates financial discipline and fosters a proactive approach to wealth-building. It instills a habit of saving and allocating resources wisely, laying the foundation for long-term financial security. In essence, the earlier you start investing, the more robust your financial foundation becomes, paving the way for a future characterised by financial independence and prosperity.

These principles apply to all investing for any person of whatever age or situation and in any investment product. Speak to me now to discuss how best to harness the miracle of compound interest given your circumstances.