What is Compound Interest?
For those of you who don’t know, compound interest is calculated on the initial principle as well as on the accumulated interest. This means that you will be earning interest on interest that will fetch you significant returns. The best part about compound interest is that it grows much faster than simple interest because that is only applicable on the principle amount.
Why You Need to Save
The only thing that makes compound interest work is time. Think of it this way, if you start right now and leave your investment untouched, you can have a very handsome amount within a few years. If you have just started earning, you must be struggling with a lot of expenses such student loans, retirement money, saving up for a house etc. But setting a part a small amount will give you great returns, thanks to compound interest.
Reasons to Invest Early
Here are some of the reasons why you need to invest early:
Time Is Crucial
As mentioned above, compound interest grows with the passage of time. If you do a simple investment of $1000 in your 20s, compound interest will work its magic and you will have more than $8000 dollars by the time you retire. The more you delay saving, the lesser amount you will have by the time you hit retirement.
You Can Take Risks
If you start investing at a young age, you have the freedom to take risks, because you have years of earning ahead of you. People who are close to retirement tend to prefer low risk and low return investments such as certificates of deposits as well as bonds, whereas young people can diversify their portfolio with the help of risky investments that offer great potential returns.
Young investors have a lot of time that they can use to learn about the advantages as well as the disadvantages of different opportunities, and learn from their success and failure.
The younger generation is tech savvy, so they can do their research and study different tools and techniques that can give way to countless opportunities that would secure their financial future.
In conclusion, it is important that you start saving and investing as soon as possible, if you want compound interest to work in your favor. There are different forms of investments such as dividend stocks that can provide great income throughout the investment span. Young investors have the advantage of ample time to maximize their profits, which is one of the reasons why they should start as soon as possible.