Compound interest is "the 8th wonder of the world" according to Einstein.
"Those who understand it get rich, those who ignore it pay for it"
Let's see if Einstein is right.
Let's start with a definition of these. There are dozens of them on the internet but the simplest one is: Interest which comes in addition to capital already subject to interest.
Let's take a simple example, using a little calculation.
You have a basic capital of €100.
You invest this in an investment with an average annual return of 10%.
At the end of the first year you have €110 (100 + 10%), of which €10 is profit.
This means that €110 will now be subject to a 10% return.
At the end of the second year, your capital is €121 (110 + 10%), of which €11 is profit.
That's €121 that will now be subject to a 10% return.
And so on...
At the end of the 20th year, your interest will be 572.75€, i.e. x5 compared to your base capital, and this without doing anything.
Not bad, eh? Now let's imagine that every month you invest a part of your income, say 100€/month, still at 10% per year.
Your interest in the 20th year will be 48 398,67€.
Quite a difference isn't it 😅
And that, again, without much effort...
But one of the most important metrics to take into account is time ⏳
Indeed, the more the investment is made on the long term, the more the income will be consequent. It is therefore essential to invest as soon as possible and every month.
The objective is not to make an "all-in" by investing all your capital (or savings) at once. You should invest what you can live without in order to maintain a stable standard of living. Your investments should not affect your standard of living.
That is why investing even a small amount each month will make a difference in the long run, thanks to compound interest. As a reminder, the investment with the best long-term returns is real estate. We refer you to our article on the subject: https://www.algae-app.com/post/comment-lutter-contre-linflation-en-2022
You can make your first investment in real estate from €10 at Algae
Time, the most important thing!
Let's take the example of Tom and Emma who want to compare their assets at 50 years.
Emma starts to invest at 25 years old, with a basic investment of 100€.
She then invests €50 every month, always with a 10% annual return.
At age 50, 25 years later, the total profit is €47,649.
Tom, on the other hand, starts investing at 35, with the same basic €100.
He then invests €200 every month, which is 4 times more than Emma!
At 50, 15 years later, the total profit is 44,006€.
So Emma has a bigger profit at 50 years old having invested 4 times less than Tom each month!
For one reason only, she started investing earlier than Tom...
Don't wait any longer and start investing!
So the magic of compound interest is real, Einstein was right.
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