Compound interest is the interest calculated on your initial investment (principal amount) and is then added to it for the following investment period.

This means that interest can be accumulated over time and will grow the principal amount for even higher returns.

For example, let’s say you place an initial investment of RM10,000 in a fixed deposit account that earns you 7.0% interest over two years.

In the first year, you would earn RM700 (7%) from your RM10,000.

So in the second year, your total principal amount is now RM10,700 so that means you would earn RM749!

Here’s what it looks like if you save for at least five years:

Table 1

Provided you don’t make any withdrawals from your fixed deposit account, the compounding interest will only continue to grow over time.

How Long Will It Take To Earn RM1,000,000 With Compound Interest?

Not everybody has hundreds of thousands of ringgit set aside when they’ve just started working, so the following table is based on the assumption you have at least RM10,000 to invest and are willing to set aside monthly savings which you then add to your account’s existing balance after every investment period.

Table 2

Looking at the figures in the table above, it should take you about 40 years if you start investing at the age of 25.

It may not be the fastest way to earn your first million, but utilising compound interest in a fixed deposit is one of the safest ways to build your fortune one step at a time.

Get A Head Start While You’re Young

The earlier you start saving, the less you need to invest in order to reach a million ringgit at retirement age.

If you were to start saving the same amount at the age of 25 instead of 35, it’s clear that the compounding interest has had more time to grow your savings:

Table 3

Do bear in mind that you need to start saving with a sufficient amount of savings in order to optimise your earnings from compound interest.

There are of course other ways to take advantage of compound interest with higher interest rates, but you will need to practice patience and give it time before you start to see the results.

This article is contributed by, Malaysia’s trusted financial comparison portal dedicated to saving you time and money by comparing all credit cards, broadband plans and personal loans in Malaysia.