Fortune Accelerated: How Compound Interest Can Supercharge Your Wealth

Compound interest is calculated not only from the initial invested amount, but also from the interest earned each year. In other words, it is interest on already accrued interest, which allows you to accelerate the growth of investment returns over time.

Time is your best friend

In order to earn from compound interest, a long investment period becomes extremely important, says M. Skardžius. The value of compound interest is best seen over a longer period of time, so a long-term strategy is more important than short-term gains. According to the expert, the return on investment is likely to be very small in the first year, but it will continue to grow after that – time is your best friend here.

Vladimir Ivanov’s photo. / Mantas Skardžius

“For example, investing 100 euros with an average annual return of 10% return, after a year you would have 110 euros. After 10 years – 259 euros, after 25 years – 1083 euros, and after 100 years – almost 1.4 million euros. So, this interest grows according to the principle of geometric progression”, the expert gives an example.

According to M.Skardius, the most important thing is to consistently invest certain, even small amounts, and to reinvest earnings, that is, to use the principle of compound interest. This logic applies to virtually any investment vehicle, from deposits to stocks or securities, but the frequency and form of payout of investment earnings may differ.

“For example, some choose to trade shares and fix their earnings almost daily as their value fluctuates. However, in practice, frequent trading of shares is limited for small investors by considerable administrative fees. And here, let’s say, exchange-traded funds (ETFs) often do not pay earnings to investors for many years and reinvest it themselves”, says M. Skardžius.

The most important thing is to start as early as possible

Anyway, according to the expert, you can always reinvest your money on your own, but the most important thing is to start. The only thing that can be more complicated is that you will have to decide for yourself every time where to further invest the received earnings, and follow how the transactions are taxed.

“Otherwise, if you delay investing, you’ll likely earn significantly less interest in the long run, and you’ll lose some of it to inflation as you accumulate money.” Unfortunately, the latter practice is particularly common in Lithuania – people often choose to simply keep their savings in a “sock” instead of employing them,” says the expert.

Compound interest is a powerful tool for growing your wealth over the long term. Undoubtedly, any investment is always associated with risk, reminds M. Skardžius. We can reduce it by diversifying investments and relying not on emotions, but on numbers or expert insights.

window.fbAsyncInit = function() {
FB.init({
appId: ‘117218911630016’,
version: ‘v2.10’,
status: true,
cookie: false,
xfbml: true
});
};

(function(d, s, id) {
var js, fjs = d.getElementsByTagName(s)[0];
if (d.getElementById(id)) {
return;
}
js = d.createElement(s);
js.id = id;
js.src = “https://connect.facebook.net/lt_LT/sdk.js”;
fjs.parentNode.insertBefore(js, fjs);
}(document, ‘script’, ‘facebook-jssdk’));