# Compound Interest

March 11th, 2007A very simple, a very old idea, and a very powerful tool to achieve financial freedom.Do you know you could give your child a very good chance that he or she would be a millionaire by the age of 55 for just over a dollar a day?

It is simple, invest $1.16 a day in an investment that achieves 10% annual rate of return a year. When the child (adult now) reaches the age of 55 that investment will be worth a cool 1 Million Dollars.

It is called compound interest and itâ€™s probably the most powerful financial tool out there and most likely one of the oldest.

Simply put, if you put $100 in a bank account that pays 10% per year at the end of one year that account should earn $10 in interest or $100 x .10, which equals $10. Leave the money in the account and at the end of that first year the account is worth $110. After the second year the account earns $11 in interest or $110 x .10, which equals $11. Add that $11 to the existing $110 in the account and you have $121.00 in the account.

After 50 years that original $100 is worth, $10,671.90.

If you add an additional $100 to the account every year in 50 years that account would be worth, $116,390.85.

Getting interest on interest is called compound interest.

Unfortunately the best of plans can not be guaranteed. The interest rate you can get does change. During the late 1970â€™s banks were paying upwards of 17% and higher on Certificates of Deposit (CDs), and lately in 2004 and 2005 banks were paying interest rates of 1% and 2% on bank accounts.

What can be safety assumed? Nothing really, but we can say this:

What is $10,000 worth in 60 years? If you assume a 10% rate of return and management fees of 1.3% your grandchild could expect an account worth 1.3 Million dollars.

As usual you should consult a trusted advisor, taxes may be levied and the above scenario may not be right for you or your beneficiary.

Read the prospectus, it is a document that gives the information you need to know prior to investing. Donâ€™t skip it! If you do not understand it, then get help. Never invest in anything you do not fully understand.