Compound interest has been called the eighth wonder of the world. Although it may not be as jaw dropping as the Great Wall, if you use this wonder to your advantage, it will affect your financial life more than you ever imagined.

First of all, what is compound interest? To quote Albert Einstein, it is “the greatest mathematical discovery of all time”. But unlike many mathematical concepts that are complex and require a degree in physics to comprehend, compound interest is actually quite simple. There are only two necessities for the wonder to work:

1. Reinvestment of your funds
(No matter how little you have to invest starting out, you can follow this step by not cashing in on your earnings) and
2. Time
The longer amount of time you have your investment without cashing in on the principal or the earnings, the faster it will grow. Leaving your original investment to accumulate interest and reinvesting that interest greatly increases the earning power of your principal. (This is when the interest compounds, or rather, earns interest on the interest.)

The most amazing part of compounding interest is that you don’t have to do any work for your earnings! All you have to do is keep your hands off and let it grow.
Here’s an example. It’s simple, but it’s truly all you need to understand how the process works.
Let’s say Bill is 25 years old. He invests $1,000 at an APR (annual percentage rate) of 5.5%, and interest is compounded once a year.* After one year, he will have $1,055. That’s $55 earned in interest. It may not sound like much for a year’s earnings, but remember- Bill didn’t do any work for it!
By the time Bill is 30, if he leaves his principal and reinvests his earnings, he will have $1,306.96. Now we’re talking! This is over $300 earned without adding any more money to the principal (besides the reinvested interest, of course). If you chose to add an amount of money to your investment along with reinvesting your interest, your money would grow even faster. If Bill contributed an extra $100 every year (less than $9/month) for those five years, he would have $1,895. Adding even the smallest amount to a fund that has compounding interest makes your money grow at an accelerated rate.

Want to crunch the numbers for yourself? See how much money you could be generating without lifting a finger at
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Your greatest earning potential is right this moment, my friend. Being a college student, you are young and have decades in front of you, allowing yourself plenty of time to invest and have your earnings compound. Again, it doesn’t matter how much money you start with, the important part is that you invest it (and reinvest it) and don’t cash in on the interest.
If you invest early (now!) and contribute money often, you will experience having your money work for you. What excuse do you have not to let your money do all the work?

Look for “Compound Interest, Part 2: The Rule of 72”, coming soon!

*Many funds are compounded more than once a year; often funds are compounded quarterly, or four times per year.

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