The mention of compound interest will usually arouse knowing nods in the room. However, if everyone seriously understood what compound interest is, then there wouldn’t be as many people falling into the depths of bankruptcy due to credit card debts.By taking note of how credit cards employ this very principle on our debts would be a prudent first step.
Essentially, it’s interest generated on top of interest plus the principal sum over a length of time.
A financial instrument with a higher rate of return could help you to achieve the same goal with a smaller amount of savings every year.
And the earlier you start saving,the more wealth you can grow. However, any form of investment will carry a certain degree of risk.
Do you know that if you want to have $50,000 in 20 years' time, you need to set aside $187.50 per month if you invest in an instrument that gives you an annual rate of return of 1%? However, if you only start saving 10 years later, you will need to save $395 per month! So start to set aside savings early.
Conclusively, compound interest works better for us if it happens more frequently. Which is to say, twice yearly is better than yearly and quarterly is definitely better than twice yearly and so forth.
Therefore ideal investment plans should have these features:
- Returns of at least 5%
- Compounding on a monthly basis
- Low risk with high winning percentage
- Flexible withdrawal for liquidity (i.e. one is able to stop anytime)
The Investment Linked Plans (ILP) I got for myself has such benefits too. I hope I could get more in return in 20 years with such plans, than if I were to put the money in fixed deposits or bank.
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