Blog #7: The Cold Hard Facts of Compound Interest (2 minutes, cold!)

Blog #7: The Cold Hard Facts of Compound Interest (2 minutes, cold!)

It's 7am on a Bank Holiday Monday here in Ireland. I'm sitting in the back garden with the sun coming up, squinting at my computer, am I dreaming!?

Speaking of dreaming, last week (Click Here) we looked at the possibilities regards your financial lives, and you were asked to dream BIG. As you read this I invite you to pop your goals in the comments box below, purely as a way to let me know what areas to focus on for you, my dear reader! (Feel free to leave your name as 'anonymous' if more comfortable doing so).

In the mean-time lets look at a tool which you will undoubtedly be using in no small way in order to reach many of your financial goals, Compound Interest.

The Bank Holiday Brain Boost!

snowball-957759_960_720

(Say's you, its the middle of summer, why snow-balls.....bare with me!)

Lets imagine you are a snow-ball, a tiny little snow ball weighing 1kg, atop a very large mountain. This snowy mountain is gentle-sloped and very very wide, spread across many miles, not unlike something you'd see on a David Attenborough documentary! You set out on a journey from the very top, with the aim of making it to the very bottom. Every mile that you roll you will gain 10% in weight because you pick up snow as from the mountain top. After 100 miles what weight will you be??

If you reckon the answer is 100kg I'm afraid you are currently missing out on the key principal of compound interest! So lets figure this out, and begin to learn how to apply it for your own benefit.

If you, the snowball, are 10% heavier after 1 mile you weigh 1.1kg after 1 mile, right? You gain 10% after another mile, so that is 1.1kg * 10% = 1.21kg after 2 miles. After 3 miles you'll weigh 1.33kg. After 10 miles you'll weight not 2kg (10% for 10 years), but you'll weight 2.59kg! You are gaining weight on your weight, if you get me!

After 100 miles you would have been forgiven for thinking you'll weight 100kg, however due to the power of compound interest of the snowy form you'll weigh 13,780kg!!!

snow mountain

This is an undeniable mathematical fact. Google it!

Seeing as it's a Bank Holiday we'll go easy on you but next week we'll go a bit heavier on the figures and look at the practical implications of this based on your own financial goals.

800px-Memento_Timeline

(We'll have a few graphs but nothing whacky like this, though it was a good film!)

Please do remember to share one or two of your goals in the comments below.

As always I'm utterly grateful to you all for reading what I write. I'm even more grateful when people subscribe to the website (www.informeddecisions.ie) and read it every week.

Thanks,

 

Paddy.

 

 

 

 

 

 

 

 

No Comments Yet.

Leave a comment