{"id":351,"date":"2021-01-18T10:04:06","date_gmt":"2021-01-18T08:04:06","guid":{"rendered":"https:\/\/swaper.com\/blog\/?p=351"},"modified":"2022-03-08T16:23:00","modified_gmt":"2022-03-08T14:23:00","slug":"compound-interest","status":"publish","type":"post","link":"https:\/\/swaper.com\/blog\/en\/compound-interest\/","title":{"rendered":"The Power of Compound Interest (And How It Works)"},"content":{"rendered":"

If I were to ask you what the eighth wonder of the world is, what would you say?<\/p>\n

If you asked Albert Einstein, he would say: compound interest<\/strong>.<\/p>\n

Yes, a mathematical concept has been nominated as one of the wonders of the world.<\/p>\n

Compound interest has also been called the \u201creal route to riches\u201d and \u201cthe most powerful force in the universe\u201d.<\/p>\n

Why?<\/p>\n

It\u2019s what allows a regular earner to retire a millionaire<\/a>, a family to afford the best education for their child and a grandfather to contribute to his daughter\u2019s house deposit.<\/p>\n

It\u2019s also one of the main ingredients of the P2P investing pie<\/a>.<\/p>\n

What is compound interest?<\/h2>\n

Put simply, compound interest is the interest you earn on your interest<\/strong>.<\/p>\n

When you make a return on your investment<\/a> and reinvest it, your principal grows.<\/p>\n

As the years go on, the interest you earn keeps increasing because your principal is growing. Over time, this can turn into a small fortune: year 1 you make 10% on 100\u20ac, but in year 2 you\u2019ll make 10% of 110\u20ac, and in year 3 you\u2019ll make 10% of 121\u20ac. This keeps on increasing until you decide to withdraw<\/a>.<\/p>\n

To illustrate exponential growth, we’ll use a classic story between the inventor of chess (named Sessa) and his ruler<\/a>. The story goes that Sessa challenges his ruler to keep adding grains of wheat to a chess board. The first square has one grain, the second has two, the third has four, and so on.<\/p>\n

Each square, the number of wheat grain doubles and the challenge is to reach the last one, square 64.<\/p>\n

The ruler laughs and accepts the challenge, only to then realize that the 64th square would require 18,446,744,073,709,551,615 grains of wheat.<\/p>\n

In 2020, that\u2019s 2,000 times annual production!<\/p>\n

The moral of the story is that although your grains of wheat won\u2019t look like much at the beginning, with a high return, the number of grains you own will increase exponentially and you\u2019ll soon find yourself with more wheat grains than you initially imagined – a nice situation to be in.<\/p>\n

Compound interest and money<\/h2>\n

But, enough about grains – how does this translate to money?<\/p>\n

You just need to open up a compound interest calculator and input some numbers to see the magic unfold before your eyes.<\/p>\n

We\u2019ll take a real-life example:<\/p>\n

Anna invests 100\u20ac every month from the age of 20 and earns a return of 14% every year.<\/p>\n

At the age of 60, she will be a millionaire with 1,517,640.70\u20ac in total.<\/p>\n

David is wary of investing and prefers saving his 100\u20ac every month and leaving it in a savings account with no interest.<\/p>\n

He\u2019s left with just 48,000\u20ac at the age of 60.<\/p>\n

That\u2019s a huge difference of 1,469,640.70\u20ac.<\/p>\n

Compound interest is that extra million and a half<\/strong>.<\/p>\n

The craziest part is that even if David decided to invest 200\u20ac per month, but didn\u2019t start until the age of 30, he would have 806,950.99\u20ac by the age of 60<\/strong>.<\/p>\n

It\u2019s still pretty good, but it\u2019s over half a million less than what Anna has.<\/p>\n

That\u2019s because in the last 10 years of Anna\u2019s investing timeline, compound interest is accelerating her returns at a rate that David would need an extra ten years to get to.<\/p>\n

That’s the value of compound interest.<\/p>\n

\"Compound<\/p>\n

Source<\/a><\/p>\n

Compound interest and P2P investing<\/h2>\n

Compound interest is a powerful tool that works for any asset class that offers a return. The only difference is that compound interest is a lot more powerful if your return is higher<\/strong>.<\/p>\n

It’s common to refer to the stock market as an example of how compound interest works.<\/p>\n

Although it\u2019s correct, the stock market generally offers a return of 8% per year<\/a>.<\/p>\n

This means that if you invest 200\u20ac every month from the age of 20 to the age of 50, you\u2019ll end up with a nice pot of 262,520.97\u20ac. But what if your returns were 12%? Or even 16% (like we offer to loyal customers at Swaper<\/a>)?<\/p>\n

The numbers grow quickly.<\/p>\n

We’ve put them into a table so you can see just how quickly they grow:<\/p>\n

\"Compound<\/p>\n

 <\/p>\n

As you can see, with a return of 12%, you\u2019ll have a nest egg of \u20ac550,173.79<\/strong>.<\/p>\n

That’s more than 2X growth based on an 8% return.<\/p>\n

However, with 16%, you end up with 4X growth -and you’re now a millionaire!<\/p>\n

Returns make a big difference.<\/p>\n

How to maximize your returns with P2P investing<\/h2>\n

One of the advantages P2P investing has over the stock market<\/a> is higher returns.<\/p>\n

Sure, you can earn higher returns with the stock market, but only if you\u2019re a day trader and are willing to put in the extra effort to learn the ins and outs of business management.<\/p>\n

With P2P investing, you can access much higher returns without having to learn what a P\/E ratio is or how to read a balance sheet.<\/p>\n

With P2P investing, you just need to add your funds<\/a>, set up your Auto-Invest Portfolio<\/a> and make sure to reinvest your earnings<\/strong>: Taking advantage of the reinvest functionality is what enables the magic of compound interest.<\/p>\n

You can set up a monthly contribution, and then sit back and watch your investments grow<\/a>.<\/p>\n

If you want to reach the highest returns possible, here\u2019s how you can do it with Swaper:<\/p>\n