Money Management: The Financial Force of Compound Interest

It’s almost impossible not to mention the global pandemic nor feel its effects. We are aware of how lockdowns and travel restrictions have affected crew and our thoughts are with everyone who may be feeling uncertain about what comes next.

However, we also know it’s never a good idea to neglect your personal finances even when you’ve taken a hit financially. In fact, it’s more important than ever to think about how small actions now can add up to big impacts over time.

Take compound interest, for example. Compound interest refers to a method of continually reapplying interest to a principal (the original sum of money put into savings or investment) that is growing over time. This calculation of interest is present on virtually all credit card and loan payments where a debt grows with each unpaid billing cycle. That’s when compound interest works against you.

Put simply, compound interest is interest on interest, which is a powerful financial force when allowed to accumulate over a long period of time. Compound interest puts your hard-earned money to work and grows larger as it feeds on itself.

However, it can work to your advantage when applied to your savings or investments. Put simply, compound interest is interest on interest, which is a powerful financial force when allowed to accumulate over a long period of time. Compound interest puts your hard-earned money to work and grows larger as it feeds on itself.

Some finance industry experts claim it was Albert Einstein who said “compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t pays it.” Perhaps it wasn’t Einstein, but regardless of who said it, it rings true. The most important thing is that you use compound interest to your advantage and make your savings work harder.

And the good news is you don’t need to start with large amounts of money. Whatever amount you can afford to put away in a savings account and the longer you let interest compound on itself, the more dramatic your gains will be. Therefore, it’s better to start putting away a small sum regularly sooner rather than waiting to invest a larger sum.

As we always say, it’s never too late — or too early — to start saving. And there’s never a “right” time. The best time is now. Even the smallest amounts can make a difference over time and it’s easier to start early and to make it one of your regular money habits.

This article originally ran in the September 2020 issue of Dockwalk.