Compound Interest

Posted on August 10, 2006
Filed Under Evere Wonder?, Timeless Questions | Leave a Comment

coin-stacks-compound-interest.jpg Most people are familiar with the concept of compound interest these days. When taking out a mortgage to buy a home it works against you, but when investing in a certificate of deposit it works for you. Compound interest is the amount of interest paid on the total value of the principal and any accumulated interest. It is the slow and steady road to building wealth over the get rich quick strategies that are so often promoted on infomercials. It is the same lesson from the story about the tortoise and the hare.

An example of how compound interest works for you can be seen in this scenario. If a person invested $20 a week at 5% interest annually that investment would be worth $1,065 after one year; $13,486 after 10 years; $35,723 after 20 years; and  $132,828 after forty years. A small amount invested at regular intervals leads to a significant gain over time. Needless to say it is more fun to look at how investments grow using compound interest than it is to calculate the actual amount you pay for a home over the life of a typical 30 year mortgage.

As is often the case, principals in one area of life work in the same manner in another area of life. In this case C.S. Lewis, renowned philosopher and author, describes the spiritual truths of compounding interest.

Lewis writes, “Good and evil both increase at compound interest. That is why the little decisions you and I make every day are of such infinite importance. The smallest good act today is the capture of a strategic point from which, a few months later, you may be able to go on to victories you never dreamed of. An apparently trivial indulgence in lust or anger today is the loss of a ridge or railway line or bridgehead from which the enemy may launch an attack otherwise impossible.”

Are the little decisions you make each day really of infinite importance? Are there areas of life that you have invested in over time that are beginning to pay off? Can you see areas of neglect that over time have begun to feel more like the weight of an unpaid loan that has reached its maturity date?

Every once in a while someone gets lucky and wins the lottery or hits the jackpot. On the other hand every day everyone makes decisions that will determine the outcome and destination of their life by the same principle of compound interest. Those that work the land know this as the principles of sowing and reaping. Those that work in the financial world know it as the value of compound interest. So, the next time you look at your 401k retirement account balance or are considering giving in to that familiar temptation calculate the compounding effect it will have on your life.

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