The Power of Compound Interest

Thursday, January 31st, 2019

“The strongest force in the universe is compound interest.”  Albert Einstein

“My wealth has come from a combination of living in America, some lucky genes and compound interest.” Warren Buffet

If you are patient and disciplined, your money can work for you and make a real difference in your account balance over time.

For compounding to work, you need to:

  1. Start now.
  2. Invest regularly.
  3. Be patient.

In simple terms, compound interest means that you begin to earn interest income on your interest income, resulting in your money growing at an ever-accelerating rate.  For example, if you have Shs1,000,000 and earn 10% in interest, you have Shs1,100,000 after one year.  If you earn another 10% interest in the second year, you will have Shs,1,21000, and so on until you have a substantial balance in your account.

Here is in a typical example:

Let’s say you begin with two separate Shs1 million investments that each earn 10% a year (keep in mind this is a hypothetical example, and actual returns would likely be different and a lot less predictable). In one Shs 1 million investment, you withdraw your investment earnings in cash each year, and the value of your account stays constant, as you see with the flat line in the chart below. In the other investment, you don’t cash out your earnings—they get reinvested. The curved line below shows the power of compounding and time. If you keep reinvesting the earnings (and again, we’re assuming a steady hypothetical return of 10% each year).  After 10 years your investment will have more than doubled to over Shs2.5 million.  And if you’ve got an even longer time frame—for example, if you’re in your 20s and saving for retirement—after 20 years, your investment will have grown by more than Shs5 million. 

IMPORTANT NOTE: All investments are subject to risk.

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Indicative returns per annum

 November 2018January 2020
91-day treasury bill11.3%9.4%
182-day treasury bill13.0%11.3%
364-day treasury bill13.5%12.5%
2-year treasury bond15.5%14.1%
3-year treasury bond16.8%15.0%
5-year treasury bond16.9%16.5%
10-year treasury bond17.2%14.3%
15-year treasury bond17.5%15.5%