We all have heard that saying at some time, but what does it truly mean?

For a couple of us, the idea of compounding interest makes typical sense this is certainly good. If you put away money for quite a while, it is likely to grow gradually in the beginning, but over time it’ll climb quicker and faster and quicker. It’s just that process which makes it possible for individuals who save a good deal of cash when they are younger to become incredibly wealthy when they are older.

However, this idea is still one that many people have a hard time thinking about. Now, I’m going to walk you step by step through seven decades of compounding interest, just so that the picture is as clear as you possibly can.

Most importantly: do you know how it can benefit you? Let’s start with how it works:

Let us say that in 1 year — we save RM100 monthly. In the conclusion of this calendar year, we now have RM1,200 and we decide to invest that cash into a balanced unit trust fund which returns 8% per year. So as to keep the calculations simple, we will assume that it is a really stable 8 percent each year.

Let us consider what happens in every subsequent year to this investment.
Year One

In the first year, your RM1,200 earns a 8% return, which is RM96. Thus, at the end of year one, you have RM1,296.
Year Two

In the second year, your initial RM1,200 earns a 8% return again, which is RM96.

Also, the RM96 you earned in year one earns a 8% return, which is RM7.68.

You now have RM1,296 – your total at the end of year one – plus your new RM96 and your new RM7.68, giving you new total earnings of RM199.68.

It’s worth noting that in year two, your investment total actually went up by RM103.68 instead of just RM96 – it actually went up more in the second year than the first.

In this case, the amount you saved will look like this:

Your growth is really accelerating.

Year Cash outflow Balance brought forward Earning @8% Closing Balance Accelerated Interest
1  1,200.00  –  96.00  1,296.00 0
2  1,200.00  1,296.00  199.68  2,695.68  7.68
3  1,200.00  2,695.68  311.65  4,207.33  23.65
4  1,200.00  4,207.33  432.59  5,839.92  48.59
5  1,200.00  5,839.92  563.19  7,603.11  83.19
6  1,200.00  7,603.11  704.25  9,507.36  128.25
7  1,200.00  9,507.36  856.59  11,563.95  184.59
8  1,200.00  11,563.95  1,021.12  13,785.07  253.12
9  1,200.00  13,785.07  1,198.81  16,183.87  334.81
10  1,200.00  16,183.87  1,390.71  18,774.58  430.71
 12,000.00  6,774.58

What does that look like after thirty years? Assuming you keep contributing just RM100 a month to retirement, your total after thirty years of saving is  RM146,815.04

Year Cash outflow Balance brought forward Earning @8% Closing Balance Accelerated Interest
1  1,200.00  –  96.00  1,296.00 0
2  1,200.00  1,296.00  199.68  2,695.68  7.68
3  1,200.00  2,695.68  311.65  4,207.33  23.65
4  1,200.00  4,207.33  432.59  5,839.92  48.59
5  1,200.00  5,839.92  563.19  7,603.11  83.19
6  1,200.00  7,603.11  704.25  9,507.36  128.25
7  1,200.00  9,507.36  856.59  11,563.95  184.59
8  1,200.00  11,563.95  1,021.12  13,785.07  253.12
9  1,200.00  13,785.07  1,198.81  16,183.87  334.81
10  1,200.00  16,183.87  1,390.71  18,774.58  430.71
11  1,200.00  18,774.58  1,597.97  21,572.55  541.97
12  1,200.00  21,572.55  1,821.80  24,594.36  669.80
13  1,200.00  24,594.36  2,063.55  27,857.90  815.55
14  1,200.00  27,857.90  2,324.63  31,382.54  980.63
15  1,200.00  31,382.54  2,606.60  35,189.14  1,166.60
16  1,200.00  35,189.14  2,911.13  39,300.27  1,375.13
17  1,200.00  39,300.27  3,240.02  43,740.29  1,608.02
18  1,200.00  43,740.29  3,595.22  48,535.52  1,867.22
19  1,200.00  48,535.52  3,978.84  53,714.36  2,154.84
20  1,200.00  53,714.36  4,393.15  59,307.51  2,473.15
21  1,200.00  59,307.51  4,840.60  65,348.11  2,824.60
22  1,200.00  65,348.11  5,323.85  71,871.95  3,211.85
23  1,200.00  71,871.95  5,845.76  78,917.71  3,637.76
24  1,200.00  78,917.71  6,409.42  86,527.13  4,105.42
25  1,200.00  86,527.13  7,018.17  94,745.30  4,618.17
26  1,200.00  94,745.30  7,675.62  103,620.92  5,179.62
27  1,200.00  103,620.92  8,385.67  113,206.60  5,793.67
28  1,200.00  113,206.60  9,152.53  123,559.12  6,464.53
29  1,200.00  123,559.12  9,980.73  134,739.85  7,196.73
30  1,200.00  134,739.85  10,875.19  146,815.04  7,995.19
Total  36,000.00  110,815.04  146,815.04

There are three major lessons to learn here.

First, saving early is the secret. The sooner you are able to begin stocking money away for retirement or other large objectives, the better. As you can see from this example here, the more money sits in an account, the quicker it rises from the next decades only before you use it.

Secondly, saving consistently is nearly as important as saving early. Simply set an amount which you are saving monthly and then forget about it. Doing that is a big part of retirement savings success.

Third, how wealthy men and women continue to build their wealth is not actually a secret. They spend less than they make, save the gap, and allow the power of compound interest allow it to grow.