What would be so special for Albert Einstein to describe it as the “most powerful force in the universe” and for John D Rockefeller to call it the 8th wonder of the world? Compound interest may take us all back to high school math but it is a powerful concept when you are investing.

Simple Vs Compound interest

To refresh our memory, simple interest is to simply calculate interest on the original investment amount. Compound interest is earning interest on your interest. The first interest is calculated on the original investment amount. The second interest payment is paid on both the original investment and the previously earned interest.
 

	Compound Interest		Simple Interest
	Investment value	8% interest	Investment value	8%
Year 1	$10,000	$800	$10,000	$800
Year 2	$10,800	$864	$10,000	$800
Year 3	$11,664	$933	$10,000	$800
Year 4	$12,597	$1,008	$10,000	$800
Year 5	$13,605	$1,088	$10,000	$800
Year 6	$14,693	$1,175	$10,000	$800
Year 7	$15,869	$1,269	$10,000	$800
Year 8	$17,138	$1,371	$10,000	$800
Year 9	$18,509	$1,481	$10,000	$800
Year 10	$19,990	$1,599	$10,000	$800
Year 11	$21,589	$1,727	$10,000	$800
Year 12	$23,316	$1,865	$10,000	$800
Year 13	$25,182	$2,015	$10,000	$800
Year 14	$27,196	$2,176	$10,000	$800
Year 15	$29,372	$2,350	$10,000	$800
Year 16	$31,722	$2,538	$10,000	$800
Year 17	$34,259	$2,741	$10,000	$800
Year 18	$37,000	$2,960	$10,000	$800
Year 19	$39,960	$3,197	$10,000	$800
Year 20	$43,157	$3,453	$10,000	$800
Total Value	$46,610		$26,000

A simple strategy to harness the power of compound interest is by reinvesting your dividend or distributions you earn from your shares or managed funds. It gives you the potential to compound your returns. In conjunction with “time in the market”, the longer you reinvest, the more effective it can be.