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Learning Center Experience
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
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%
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
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.
George. (1955) The Richest Man In
Babylon. Hawthorn Publishing.
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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