If you?re about to experience the miracle of birth in your household, consider doing this: Get your spouse and all the grandparents together in one room and shake out everybody?s pockets and purses to come up with $7,000. That?s a stretch, I know ? but if you can find $7,000 and put it in a non-registered investment when your new child is born, your baby will retire a millionaire. Sounds like smoke and mirrors, doesn?t it? Well, it is magic of a sort ? the magic of compounding.
Albert Einstein, who knew a lot about math, is reported to have claimed that compounding was the greatest mathematical discovery of all time. And it certainly is true that compounding is a basic investing strategy ? a concept that, when used correctly, can make an investor wealthy.
Interest can be verrrry interesting ? and financially fantastic There are two ways to earn interest on money: ·Simple interest is a rate of interest applied only to principal (the amount of money originally invested). Any interest earned does not become part of the principal.
·Compound interest is interest earned on interest. It is calculated not only on the principal investment, but also on the interest that has been generated. This is the key to the magic of compounding because, over time, the interest on interest (also known as accumulated reinvested interest ) adds tremendously to investment growth.
Here?s a practical (but made up) example of the dramatic difference in investment growth between simple and compound interest:
· In 1492, Christopher Columbus places a single dollar in a bank at 5% simple interest. Five hundred years later, in 1992, the value of his investment would be $26.
·In 1492, Christopher Columbus places a single dollar in a bank at 5% compound interest. Five hundred years later, in 1992, even if it had been taxed at 35% each year, the value of his investment would be $9.6 million!
The key to success ? start early and stay invested The key to compounding is time. The longer you leave your investment alone, the more powerful the effect of compound interest. And the earlier you start your investment, the more you make from compound interest. (If you want to know exactly how long it will take for your investment to double, just divide the interest rate you are receiving by 72. This is known as the Rule of 72 . For example, if your interest rate is 8% (compounded annually), simply divide 8 into 72 to discover that your investment will double every 9 years!)
A million reasons to start now!
And that brings us to that million-dollar baby of yours. If, on the day your baby is born, you do manage to collectively come up with $7,000 and make a non-registered investment that delivers an 8% return, compounded annually , there will be $1,041,459 in the investment (ignoring the potential effect of any income tax) when your child reaches age 65 ? and that?s without plunking another penny into your investment for 65 years*. Just imagine how much your child would have if you ? or your child ? continually added to that investment!
Of all the investment strategies available today, the one that works best for most people is buying and holding key investments for a long period of time. And the success of that strategy is due almost entirely to the magic of compound interest. Talk to your professional financial advisor about the best ways to put the magic of compounding ? and all the other good strategies for wealth accumulation ? to work for your child ? and for you.
* The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant. Insurance products and services are distributed in Quebec by Les Services Investors Limitée (Financial Services Firm), and elsewhere in Canada by I.G. Insurance Services Inc. (insurance license sponsored by The Great-West Life Assurance Company).Robert O. Bob Johnson Consultant #11667 Dawson Creek BC. Bus. 250-782-4312 Cell: 250788-6265 BC North, RO #038