The profitability of compounding interest works regardless of interest rate. The higher the interest paid, the
faster the growth. The more frequently interest is compounded, the faster it grows. Interest compounded
daily grows faster than interest compounded monthly, quarterly, or annually.
Banks, for example, will charge you interest on your loans compounded daily (more money for them). And
they will pay you interest on your savings quarterly (less money for you).
You can go to http://investor.gov/tools/calculators/compoundinterestcalculator and check out different
results. Plug in your current principal and optimal monthly additions. See how much your money will grow
over time.
Yes, compounding interest is profitable. But how can you get it? You know banks are paying nearly zero
interest on accounts. Bonds and stocks have higher interest or dividends, but the underlying asset is subject
to risk and market swings.
What good is earning 8% on $10,000 in stocks and bonds, when the underlying $10,000 might drop to
$6,000? When you add market fluctuations into your compounding interest growth, you end up with
Figure 1.4
Multiply
remarkably less money.
Figure 1.4 shows compounding when you include stock market losses that reduce your capital.
Uninterrupted, this same 8% yield would give you over $9 million! (See Figure 6.2 in Chapter 6 of my
book)