The Magic Of Compound Interest

Christians are called to be good stewards of God's resources. A steward can be described as someone who manages the resources of another. "The earth is the Lord's and all that is in it, the world and those who dwell therein"-Psalms 24:1 (The New English Bible). To effectively manage God's financial resources, it helps to have some understanding of modern day financial concepts, strategies, and mathematical formulas. Compound interest is a great ally in catapulting you toward achieving your financial goals. Through an understanding of compound interest, God can pour out a blessing upon you, which you will not be able to measure! Albert Einstein once called compound interest "the world's most impressive invention" and dubbed it the "eighth wonder of the world." Compound interest means all the money you've invested earns interest and then the combined amount of the original investments plus your interest earns more interest. Compounding means interest added to interest. Compound interest does not produce linear growth like the pattern 1, 2, 3, 4, 5, 6, and so on; it produces geometric growth through compounding like the pattern 1, 2, 4, 8, 16, 32, and so on. Usually, the more frequently your money compounds when earning interest, the better. For example, daily compounding is normally better than monthly compounding, which is better than quarterly compounding, which is better than yearly compounding.

A basic formula for compound interest is as follows:

FV = ID (1 + R)T, then FV ? ID

Where:
FV = Future Value
ID = Initial Deposit
R = Rate (interest rate earned)
T = Time (number of years invested)

Assuming the following investment--$10,000 Initial Deposit, 6% interest Rate, 5-year Time period, the math would work as follows:

FV = $10,000.00 x (1 + 0.06)5

Formula results by year are as follows:

Year 1 $10,000. 00 x (1 + 0.06)1 = $10,600.00

Year 2 $10,600. 00 x (1 + 0.06)2 = $11,236.00

Year 3 $11,236. 00 x (1 + 0.06)3 = $11,910.16

Year 4 $11,910. 16 x (1 + 0.06)4 = $12,624.77

Year 5 $12,624. 77 x (1 + 0.06)5 = $13,382.26.

Then FV ? ID = $13,382.26 - $10,000.00 = $3,382.26 (Total Interest Earned).

The effect of the individual parts of the formula in combination with each other produces synergistic results in the outcome that are greater than the sum of its parts individually. In other words, small increases in any of the components can have a dramatic incremental effect on the total compound interest earned.

Another useful tool in approximating the magic of compounding is the "Rule of 72." Albert Einstein is credited with discovering the compound interest Rule of 72 and said, "It is the greatest mathematical discovery of all time." The Rule of 72 is a mathematical way of approximating the number of years it takes an investment to double in value. You estimate the number of years for an investment to double by dividing 72 by the annual rate of return. For example, if you expect to earn a 10% return on your $10,000 investment, then 72 divided by 10 = 7.2 years for your investment to double in value to $20,000. Conversely, if you expect your $10,000 investment to double in 7.2 years and you want to know the interest rate needed, you simply take 72 divided by 7.2 = 10% interest. You can even use it to compare stock market interest rate returns to other investments. For example, assume you are looking at lots with a real estate agent. The agent tells you the properties have doubled in value during the last 14 years. You could get a quick estimate of the increase per year in value by doing the following math: 72 divided by 14 = 5.14% per year.

There is one formula that is infinitely more important than even the "Rule of 72": "1" cross + "3" nails = "4" given. Praise God!

Bill G. Page is the author of Making Money Work: A Christian Guide For Personal Finance. This book explains the "Rule of 72" and many other financial concepts. It includes a CD ROM so you can easily calculate compound interest and lots of other complicated financial formulas. The book can be ordered from www.MakingMoneyWork.us or you may request the book from your local Christian bookstore-available to retail stores through Spring Arbor and Appalachian Christian book distributors beginning in September 2005.

This article is adapted from Making Money Work: A Christian Guide For Personal Finance with permission of Willie Glenn Page, Inc. Copyright 2005.

Bill G. Page
Making Money Work: A Christian Guide For Personal Finance (book and CD ROM)
http://www.MakingMoneyWork.us

Eight Ways To Sink Yourself Financially

1. Don't focus on your finances.The reason most people get into debt is because they... Read More

The Changing Shape of Family Finances

Super-mumsIt seems that the proof of maternal efforts is no longer found in the pudding... Read More

10 Tips To Save Money When Dining Out

Here are some tips that can help you save money when dining out. Keep in... Read More

Learning the Basics of Handling Money

With prices increasing all the time, saving money can be harder and harder to do.... Read More

Personal Finance ? Why You Should Compare, not Despair

Sorting out your personal finances can be a tricky and exasperating time. Whether you are... Read More

Adverse Debt Levels Blight UK Consumers Personal Finances

Debt levels are at an all time high in the UK. The younger generation tend... Read More

Debt Management ? Watch Out for Bank Fees!

During the last twenty years, banks have offered a number of improvements in the area... Read More

Whats The Truth Behind Your Finances?

Between 15 - 20% of people in our country (UK) own there own businesses. This... Read More

Dramatically Improve Your Stock Trading Success

Get Access to Realistic profitable strategies & discover the mindset to dramatically improve trading success.*... Read More

A Fresh Start for Family Finances in 2005

While 40% to 50% of us make New Year's resolutions on January 1-a ritual that... Read More

What is a Traditional IRA?

With a traditional Investment Retirement Account (IRA) you pay taxes when you take the money... Read More

Why Live Frugally

What is it about being frugal, why do it at all? Actually, some people don't... Read More

Personal Finance - Have Consumers Had a Belly Full of Personal Debt?

For months, we were trigger-swipe happy, putting our groceries, clothes, holidays and service charges on... Read More

Ways to Save Energy and Slash Electricity Bills

1. Lighting & Light Bulbs Install low energy light bulbs in rooms you use... Read More

College Expenses: Seven Ways to Save on an Education

Many people graduate from college owing thousands of dollars in student loans. It isn't uncommon... Read More

Knowing Me, Knowing You: Why ID Protection Plans Are Flawed For Fraud

ID theft is a major consumer concern, though there is apparently much confusion about proactive... Read More

The Wright Place - Finances

Women have a love/hate relationship with money. Most of us do not enjoy dealing with... Read More

Top 10+ Ways to Jumpstart your New Year?s Finances!

Of course, these don't have to be done in any particular order! Just pick one... Read More

If I Had a Structured Settlement, I Would Use It to Pay for Gas

Has anyone been to the gas pumps lately? Soon $3 a gallon will be the... Read More

Car Donations and Used Car Donations

Car donations and used car donations are the way many people choose to recycle their... Read More

Saving Money On Gasoline For Your Automobile

The gas that we fill our tanks with every week adds up to be quite... Read More

Money Matters - Really!

One of the biggest challenges facing black RELATIONSHIPS today are finances. Many people mistakenly feel... Read More

Know Thy Finances

The first step to financial success lies in knowing your financial situation at any given... Read More

How to Attain Your Dreams on a Single Income

If you recently became a single parent and see your dreams being washed away because... Read More

What Happens if You Die Without Making a Will

If you die without making a Will in the UK, the state will decide who... Read More

Saving Money - The Magic 20 Percent

Saving money is not easy and is made more difficult if you have a short-term... Read More

The Wonderful World Of Address Labels

Ever wonder where address labels come from? Avery® is perhaps one of the most well-known... Read More

Reduce College Debt with Scholarships

Six Scholarship judges were sitting around an oval table. Forms were piled into 50 boxes.... Read More

Affording a Home

Can you really afford a house? If so, how much house can you afford? To... Read More

Benefits of Personal Finance Software

In this age of information, keeping track of your finances does not mean an archaic... Read More

Budgeting Made Easy

Well, dang! From what I've heard and read, it looks like we've reached an all-time... Read More

Simple Ways to Save Money

Things are so expensive these days. We seem to be hearing, and saying, that a... Read More

Can You Afford Not To Look After Your Personal Finances?

Investing is a subject a lot of people don't want to think about. And there... Read More

Budgeting the Key to being Financially Stable

Single Mother's in need of Financial GuidanceBudgeting is key to being financially stable. A budget... Read More

How to Balance Your Checkbook ? Get a Calculator and Pencil and You are Ready To Go!

Despite how easy it is to balance a checkbook, very few people take the time... Read More

Vesting and Your 401(k)

Do you have a 401(k) retirement account? Are you vested yet? Before you move on... Read More

Portfolio Planning can Lead to Irreconcilable Differences

The judge had to ask the question, and we had to answer it in order... Read More

Live Green; Save Green!

Have you seen the recent article on a new "green" residential high rise in Battery... Read More

Personal Checks ? Extreme Benefits

Millions of people have a checking account and many people have two of three. They... Read More

10 Quick And Cheap Ways To Cut Your Heating Bill

When you received an energy (heating) bill last winter, were you afraid to open it?... Read More

What is ChexSystems?

Commonly referred to as the first of the three major "Check Systems" in the U.S.,... Read More

Bankruptcy Chapters Explained

Chapter 7The potential chapter 7 debtor should understand that a straight bankruptcy case does not... Read More

First Checking Account ? When is it Time?

We all know that money doesn't grow on trees, but we all need it to... Read More

Identity Theft ? More Tips on How it Can Be Avoided

Recent security breaches at several credit card companies continue to worry Americans, as stolen financial... Read More

10 Steps To Improve Your Financial Situation

Here are ten steps you can follow to help improve your personal financial situation and... Read More

Your Dry Cleaner?s Double Standard

Women are charged more for dry cleaning services. Don't fume, find a better way. While... Read More

One Income Source Is Not Enough!

My personal opinion is that in today's new economy, it is wise to have multiple... Read More

What Are We Teaching our 2005 Graduates about Money?

Now that we are in the month of June I can't help but wonder if... Read More

Take Control and Master Your Kitchen

Those who keep a watchful eye on where their money is spent, have long conquered... Read More

Debt Management ? More Ways to Save on Gas Consumption

The price of gas continues to climb, and with continued uncertainty in the Middle East,... Read More