• Investments: Compound Interest

    By Dr. Crystal D. Gifford, CFP®
    Full-Time Faculty, Kaplan University  
    Published March 2016

    Many people claim to know and understand the power of compound interest, but if we really understood it and how capable it is of changing lives, we would use it more powerfully. Einstein is said to have called compound interest the eighth wonder of the world.  This statement is not only warranted, but if we would embrace its power and actually save the money we have been encouraged to save by financial planners, our entire lives and that of our children would be forever changed. 

    In his book, The Richest Man in Bablyon, George Clason speaks of saving in terms of “one tenth of what I earn is mine to keep.”  In the book, he highlights the impact saving just a small portion of income can have on creating wealth. The key here, though is that “to keep” means to save to a point that the interest earned on the money saved also begins earning interest, known today as compound interest.  Clason referred to this as the gold coins having baby silver coins who eventually grow up and have their own coins until the value of the babies outweighs the value of the original gold coins set aside. 

    Planning for Savings

    When planning for saving, one needs only to focus on the power of growth and the concept of time.  The more time, the more powerful the growth that can occur. The other concern is interest rates earned (or rate of return).  The higher the rate earned, the faster the money grows. Of course, there is a concern for the amount of risk we take on as we earn higher rates of return, so one must explore this when making specific investment choices. 

    To put this in perspective, let’s take a look at an example written in my book, The Money Shot:  The Professional Athlete’s Financial Playbook to Make the Big Time Last a Lifetime. Going from this example, let’s assume that we are planning to invest $250,000 per year for five years and then never invest another dollar after that, but do not withdraw either, for 30 years. The results you see are an account balance of over $18 million even though the actual deposits were only $1.25 million. Imagine that power as you review this sample excerpt from the book.  



    Interest Earned 10%

    Account Balance

    Year 1




    Year 2




    Year 3




    Year 4




    Year 5




    Year 6




    Year 7




    Year 8




    Year 9




    Year 10




    Year 11




    Year 12




    Year 13




    Year 14




    Year 15




    Year 16




    Year 17




    Year 18




    Year 19




    Year 20




    Year 21




    Year 22




    Year 23




    Year 24




    Year 25




    Year 26




    Year 27




    Year 28




    Year 29




    Year 30




    Total Saved




    Now, having seen this example, we know that the average person does not have $250,000 to put away each year, but what if that was $2,500 per year. In this case, $12,500 would have grown to $181,904.15. Still not a bad deal. Next let’s add to that the possibilities if you would have put away that same $2,500 EVERY year for the entire 30 years. Imagine the growth that could occur. 

    Next time you are going out for a $4.50 Starbucks coffee, ask yourself if you have saved just a little bit back this month and consider for every coffee you also put away an equal amount in saving for your future. Just $5 a day is $150 per month and $1,800 per year. Start today and be consistent. That is all that is required to take advantage of the power of compound interest. Your future self will thank you greatly!


    This article serves as general information and should not be relied upon alone as official tax or financial advice. For application to your individual situation you want to be sure to consult your personal professional financial advisor. 

     Dr. Crystal D. Gifford is a faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.


    Clason, George. (1955) The Richest Man In Babylon. Hawthorn Publishing. 

    Gifford, Crystal D. (2016) The Money Shot: The Professional Athlete’s Financial Playbook to Make the Big Time Last a Lifetime. Morgan James Publishing.   

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