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Saving: The Magic of Compound Interest

Provided by the International Finance Corporation


Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest.  In short, you make money from your money.  Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  In fact, Albert Einstein once was purported to have stated,“The most powerful force in the universe is compound interest.”  The below three examples will illustrated the power of compound interest.

Example #1

By instilling the saving habit early in life, even the goal of becoming a millionaire by the age of sixty-five can be reached. By starting at the age of twenty and saving NGN95 per month, you can end up with a million Naira by the age of sixty-five, assuming a 10 percent return on the money (tax deferred). This is also assuming that none of the money will be withdrawn during the waiting period.

This goal also can be reached if you wait until you are older to start saving, but the amount you must contribute monthly increases dramatically the longer you wait. For example, if you wait until you are thirty years old, you will need to save NGN263 a month. If you wait until you are forty years old, you will need to save NGN754 a month, and if you wait until you are fifty years old, you will need to save NGN2,413 a month.  The below chart also shows how you can reach the NGN1 million goal by age 65 if you prefer to make a one-time investment, monthly investment or annual investment at various ages.

Age

One-time Investment

Monthly Investment

Annual Investment

20

NGN13,719

NGN95

NGN1,391

25

NGN22,095

NGN158

NGN2,259

30

NGN35,584

NGN263

NGN3,690

35

NGN57,309

NGN442

NGN6,079

40

NGN92,296

NGN754

NGN10,168

45

NGN148,644

NGN1,317

NGN17,460

50

NGN239,392

NGN2,413

NGN31,474

55

NGN385,543

NGN4,882

NGN62,745

60

NGN620,921

NGN12,914

NGN163,797

Example #2

This table illustrates the value over time of NGN1,000 invested annually (only NGN84 a month):

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

NGN5,526

NGN12,578

NGN21,579

NGN33,066

6%

NGN5,637

NGN13,181

NGN23,276

NGN36,786

7%

NGN5,751

NGN13,816

NGN25,129

NGN40,995

8%

NGN5,867

NGN14,487

NGN27,152

NGN45,762

9%

NGN5,985

NGN15,193

NGN29,361

NGN51,160

10%

NGN6,105

NGN15,937

NGN31,772

NGN57,275

11%

NGN6,228

NGN16,722

NGN34,405

NGN64,203

12%

NGN6,353

NGN17,549

NGN37,280

NGN72,052

Example #3

Investing NGN10,000 in a one-time lump sum also pays off:

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

NGN12,763

NGN16,289

NGN20,789

NGN26,533

6%

NGN13,382

NGN17,908

NGN23,966

NGN32,071

7%

NGN14,026

NGN19,672

NGN27,590

NGN38,697

8%

NGN14,693

NGN21,589

NGN31,722

NGN46,610

9%

NGN15,386

NGN23,674

NGN36,425

NGN56,044

10%

NGN16,105

NGN25,937

NGN41,772

NGN67,275

11%

NGN16,851

NGN28,394

NGN47,772

NGN80,623

12%

NGN17,623

NGN31,058

NGN54,736

NGN96,463

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