Compound Interest, the Mary Poppins Way.

Supercalifragilisticexpialidocious! It is curious that, this it is what everyone remembers the most from the classic “Mary Poppins”. However, very few have memory of the moment when one of the little ones goes to the bank. He receives a useful lesson that has existed in the world of investments since the Roman Empire. It is the concept known as COMPOUND INTEREST. In case you don’t remember the lesson, here’s an idea.

As defined by the Pan-Hispanic Dictionary of Legal Spanish, “Compound Interest” is the interest of a capital to which its revenues (utility or renewable benefit that yields a capital) are accumulated so that others can produce. Let me explain it in a simpler way.

Imagine that you have a dollar and you want that amount to increase. And you decide to invest it in a financial product. That growth that you expect is what we generally know as interest.

Now what interest should I expect? How much could my money grow? How long do I have to wait?

Interest varies on market fluctuations. In fact, no one can guarantee you in an investment, the money that you will receive at the end of the agreed time. But you may have an idea. And that’s where compound interest is your best friend.

We invest that dollar and expect it to grow at 10% per year. It means that at the end of the year you should have one dollar plus ten cents. (Your initial dollar plus ten cents which is the earnings from that annual interest). However, you decide to leave it one more year to grow another 10%. Do you know how much you would have at the end of the second year? At the end of the second year, he would have a total of $1 plus 21 cents. How is it possible? Because you received 10% interest on the dollar and ten cents at the beginning of the year, not ten percent of your initial deposit.

So each year your money earns interest on the amount you’ve accumulated, not on the money you originally put down. Allowing that the longer your money is growing, the more amount you will have in the future, such as, for example, at the time of your retirement.

In short. If you invest a dollar today and wait thirty years to grow at 10 percent, it will become $17.45. What would happen then if you invest a thousand dollars today and wait those three decades? Well, by then you will have $17,449.40.

But what would happen if you invest not just once. We will talk about this in the next article.