Becoming a millionaire with the power of compound interest

"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."

Not many people understand or even know about the power of compounding interest. It is an essential tool used in the financial world and can be used to mathematically predict future balances. The idea is simple, you earn interest on top of interest previously earned, creating a snowball effect. Using this concept, Warren Buffet turned Berkshire Hathaway into a multi billion dollar investment fund in a matter of decades achieving an average of 21% annual return.

There are 3 variables:

• Starting amount
• Interest gained per period
• Amount added per period

Have a look at these examples. Over the course of 30 years example 2 will end up with $2.1 million more (almost twice the amount) than example 1, just by starting with an extra $9000.

Now consider the next set of examples. The only difference in these 2 examples are the annual return.

As you can see the annual interest gives a multiplier effect, the ending balance of example 3 is 22 times greater than example 4, even though the annual interest is only twice as much. This is the compounding effect.

The next image proves annual interest is much more important than the starting balance, so if you don't have much capital don't worry, you can still become a millionaire by the time you retire:

Here is the formula if anyone wants to play with the figures themselves:

Note: "C107" is a cell reference to SB