Part 6: Compound Interest

Welcome back to The Apricot Investor’s Glossary series! In this article, we’ll discuss compound interest – a powerful force that can accelerate the growth of your investment garden.

Compound Interest: Your Garden’s Secret Fertilizer

Remember how investing is like planting apricot trees? Compound interest is like the special fertilizer that makes those trees grow bigger and produce more fruit over time! Here’s how it works:

1. The Power of Reinvestment: When your investments earn returns (interest, dividends, etc.), you have a choice: withdraw them, or reinvest them. Compound interest comes into play when you choose to reinvest!
2. Earning Returns on Returns: Those reinvested “seeds” then start producing their own returns, and those get reinvested too. It’s a cycle that can supercharge the growth of your garden over time.
3. Time Is Your Friend: The longer you leave compound interest to work its magic, the bigger the impact. Think of a snowball rolling downhill – it starts small but gets bigger and moves faster with time.

Compound Interest in Action

According to Investopedia, the average US stock market return is about 10% per year, as measured by the S&P 500 index.

Let’s say you invest 1,000 USD with a 10% annual return. Your results would be:

• Simple Interest: After 10 years, you’d earn 2000 USD.
• Compound Interest: After 10 years, you’d earn approximately 2593.74 USD thanks to the growth of your returns getting reinvested. That’s a 593.74 USD difference. 

Let Compound Interest Work for You

The day you plant the seed is not the day you eat the fruit. Likewise, the longer you let compound interest work, the more your money grows, even with small, but consistent contributions.

It’s why the best time to start investing was yesterday and the next best time is today!

It’s important to remember that investments are subject to market fluctuations and carry inherent risks. Before investing, consider your financial goals and your ability to take financial risks.

See you in Part 7 where we’ll explore more investment terminology. And remember, investing in knowledge is one of the most valuable decisions you can make.

*The examples in this text are for illustrative purposes only. This does not constitute investment advice or a recommendation to buy or sell any specific investment instrument.