It is reported that when Albert Einstein was asked what was the most powerful thing in the world? He said it was compound interest.
“Because compound interest is a really marvellous invention, Albert Einstein called it the 8th Wonder - It can work for you, or against you. When you invest it works for you. When you borrow it works against you!”
“Albert Einstein called compound interest "the greatest mathematical discovery of all time”
It is great and more acceptable when a great mathematician and prodigy like, Albert acknowledges compounding as the most powerful thing in the world.
Investment is ventured into with the aim of getting returns. Most invest returns come in the form of compounding gains. Take for instance, when a farmer sows a seed of groundnut or peanut or maize and many more, he always reaps multiples of what was sown. This is pure compounding.
It’s mostly exactly with many investment products and schemes. When one takes an investment policy, one has to wait patiently like the farmer. The farmer would wait for days, months and years by weeding, applying fertilizers, watering, and incurring labour and other costs to get the returns in multiples. Farmers are arguably the greatest investors and again arguably the most emotionally intelligent investors. Investors in all the other areas mostly lack the spirit of the farmer, who would sow or plant, do everything necessary and wait for the results, good or bad. Like the farmer, the investor has to constantly monitor his investments to see if he is making gains or losses and take the necessarily action required as it is done in farming where the farmer prunes his plants and does other farming activities to keep his sown seeds or plants in check, so he could get good harvest.
Compound interests is counting not by the normal order of 1,2,3,4,5,etc, but counting say, 1, 3, 5,7,15, 200, 3,000, 90,000,etc. Investments grow by compounding when the interest earned is added to the principal amount and re-invested. It would therefore be out of place to think that investments do not grow faster and for that is a waste of time and money to take an investment action.
The power of compound interest enriches you surprisingly with a matter of time. You become rich once you have an investment plan and follow it and compound interest would compound your money for you.
The power of compound encourages you to invest even when you do not have enough on you. You do not need to be a millionaire before you start investing. In fact, investing is not meant for those, who are already rich, though they are the ones who really invest. No wonder, they continue getting richer.
It is better to have an investment plan and follow it consistently with little amounts and compound interest would multiple them for you than have no plan and put in a big amount once, stops and starts waiting to get plenty in multitude.
Mathematicians and investment experts have made the understanding of compound interest easier with what they call the rule of 72. They say to know how much your money will multiply in years, just divide the interest rate by 72. For instance, if a 91 day Treasury bill rate is say 12%, then 72/ 12 = 6 years to double.
If a mutual fund, like the Gold Fund, or the Fortune Fund, or the Horizon Fund, or the Equity Fund, or the Campus Fund, or the iFund, or the First Fund, or the Heritage Fund, or the Bfund, or the Ark Fund, or the EPACK, etc (All these funds and many others operate in Ghana) is say 41%, then 72/41= 1.76 years to double.
This simple calculation informs and advises you, where to invest and get more returns quickly. The pay-back-period (the time or period of getting back your investment with benefits) is easily determined by applying the 72 rule in investing.
Your investment would be doubled every six (6) years in the case of the Treasury Bill and approximately every two (2) years in the case of a mutual fund, provided the interest rates remain the same, though it is not practicable. The higher the interest rates, the higher the returns, the shorter the pay-back-period. The opposite is also true.
Readers should take note that I’m not suggesting that mutual funds or unit trusts perform better than Treasury Bills or vice versa, they are used for the purposes of illustrations. It’s also worth saying that last year, 2010, the mutual funds in Ghana performed far better than Treasury bills in Ghana.
Invest with the mind of utilizing the power of compound interest to multiply your investment for you.
©, 2011, Godwin-Xavier Ayeebo
Email: gayeebo@gmail.com
Blog: www.g-xavierayeebo.blogspot.com
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