The Power of Compound Interest: Make Your Money Work for You

Make your money work for you by taking advantage of the power of compound interest. Not quite sure how it works? Let’s learn about compound interest and how you can make your money grow with it!

What is compounding interest?

Albert Einstein described compound interest as, ‘the eighth wonder of the world’, and as ‘the greatest invention in human history’. Rightfully, understanding how compound interest works can be a game changer for your personal financial planning.

Compound interest is interest that is added to the principal amount. In other words, compound interest simply means interest on interest, and you will get it as long as you don’t withdraw the interest you are getting on your savings account or your investment. This means that interest can be accumulated over time and will grow the principal amount for even higher returns.

How does compounding interest work?

Here’s an example, let’s say you deposit RM15 every week, for the next 20 years. That means you would save RM720 per year and you will end up with RM14,400 after 20 years.

But with the help of compound interest and an interest rate of 5%, you can actually end up with RM23,807 if you do not withdraw any interest.

Remember, the basic principle of compound interest is earning additional interest on top of previously earned interest. Therefore, this means once you earn your first interest payment, and if you do not take out the interest it will then be added to the principle. That is how you can make your money work for you by utilising compound interest!

Why is compound interest important?

When you take advantage of the power of compounding interest, it can greatly impact the amount of savings and investment you can accumulate. However, it is important to understand that you must be disciplined, consistent, and most importantly is to start as soon as possible.

Starting earlier also means you have the luxury of having more years of compounding interest. By starting early, you can gain greater return of investment even if you start with a lower total investment amount. This is especially helpful for people saving or investing their money through an investment vehicle over a long period, for example by investing in ASB.

There are of course other ways to take advantage of compound interest with higher interest rates, however, given the current state of economy, putting your money in a low-risk investment like ASB is a safe way to grow your money with competitive dividend.

Over time, with discipline and consistency, even a small amount of money has the potential to generate big returns. So even if you set aside RM30 on a monthly basis into ASB, with compounding effect you can see your money grow faster compared to keeping it in a savings account. Auto Labur also makes it easy for you to set recurring investment automatically, and the service is free.

Protect your money from inflation by investing early because you must also take into account that money in the future will typically be less valuable than money today because inflation devalues it.

Remember that compounding interests will have a dramatic impact on your money provided you are consistent and that you start early. So get started as early as possible and compound interest can work better in your favour!