When asked what he considered mankind's greatest invention, Albert Einstein's reply was:
"compound interest." Who are we to argue with Einstein? Take a look at this 8th wonder of the world… 

Two types of interest: Simple vs. Compound
Simple interest is calculated using only your initial investment.
Let's say you invested $1,000 at 7% simple interest. In the first year, you'd receive
a $70 interest payment (7% of $1,000). In the second year, you'd receive another $70
(7% on your original $1000 investment). In the third year, another $70…and so on.
Compound interest  the kind that applies to most investments  is calculated based on your original
investment PLUS any interest you've already earned. Lets go back to that $1,000 invested at 7
percent and lets say  like before  you receive interest payments annually. In the first year,
your investment would earn that same old $70 bucks (7% on $1,000). But here's where it takes off:
In the second year, your interest income would be $74.94! That's 7% interest based on your initial
$1000 investment AND the $70 you earned the first year. (Okay, an additional $4.94 may not seem like
great shakes to you. But take a look at how this difference really begins to add up by clicking below.)
One more thing you should know: Interest can be compounded at all different time periods…from annually to daily.
The more often interest is compounded, the greater the returns.
Year 
Simple Interest 
Compound Interest 
Year 1 
$1,070.00 
$1,070.00 
Year 2 
1,140.00 
1,144.90 
Year 3 
1,210.00 
1,225.04 
Year 4 
1,280.00 
1,310.79 
Year 5 
1, 350.00 
1,402.54 
While the numbers in our example aren't huge, you can see how compounding interest can amplify returns.
Imagine the effect on your portfolio when (hopefully) larger numbers are involved!
Two factors affect your rate of compounding:
 Your rate of return
 The length of time you'll invest.
The table below can help you see how compounded interest snowballs over time.
Say you invest $1.00 each year for 5 to 30 years…
The following factors are the rate at which your money would grow over time  invested at various rates
of return (interest is compounded annually).
Interest Rate 
Years Invested 

5 years 
10 years 
15 years 
20 years 
25 years 
30 years 
4% 
$5.42 
$12.01 
$20.02 
$29.78 
$41.65 
$95.03 
6% 
$5.98 
$13.97 
$24.67 
$38.99 
$58.16 
$83.80 
8% 
$6.34 
$15.65 
$29.32 
$49.42 
$78.95 
$122.35 
10% 
$6.72 
$17.53 
$34.95 
$63.00 
$108.18 
$180.94 
12% 
$7.12 
$19.65 
$41.75 
$80.70 
$149.33 
$270.29 
For example, if you invested $1.00 at the beginning of each year and it earned 4% interest for 20 years
it would be worth $29.78. Now lets scale it up. Say you invested $1,000 at the beginning of each year
for the same time frame at the same interest level. $1,000 x 29.78 = $29,780!
Let's try one more example. Say you have 5,000 to invest and you can add $5,000 at the beginning of each year.
Lets also say you choose a stock mutual fund that has an average annual total return of 10%
(Remember, there's no guarantee the fund will continue to perform at this rate. It could do worse  or even better.)
After 5 years, you may have $XXXXX (5,000 x Factor). After 10 years your investment could be worth X. And so on.
Now that you see the beauty of compounded interest over time…we're ready to move on to a less popular subject:
Risk. Don't worry…it's not as bad as you think…


