The Formula For WealthBecause it’s the foundation of all great wealth, it’s essential that you understand how the formula really works.

There will be a little math in this section, but don’t worry, it’s simple.

Firstly, here’s the magic formula:

FV = Principal × (Rate)ⁿ

Let’s make it easier to understand by breaking it down:

FV is the Future Value of your investment. 

Principal is the amount of money you start with.

Rate is your rate of return, i.e. the “interest rate” you receive on your money.

N is the number of times the interest is applied. 

Example

Suppose you invested $1000 with 10% compound interest being added once a year, for 5 years.  The formula would be:

FV = 1000 x (1.1) ⁵

which means…

FV = 1000 x (1.1 x 1.1 x 1.1 x 1.1 x 1.1)

which works out at:  $1,610.51

Free Software Tool

Use the free compound interest analyzer to see the formula in action.

NOTE - If you were to make additional contributions to your initial investment then it would grow even faster.  However let’s keep things nice and simple here because all we really want to do is understand…

Why Compound Interest Is SO Powerful

Look at the formula again:

FV = Principal × (Rate)ⁿ

So far as creating wealth is concerned, the most important part of the formula is this:

(Rate)ⁿ

Simply put, (Rate)ⁿ is your TOTAL rate of return.  It’s what actually produces the mighty multiplication that leads to great wealth.

The two variables:

• Interest Rate
   
• Number of Periods

are multiplied exponentially. That means your total rate of return can grow very large very quickly. 

Let’s see this effect in action by increasing the value of each variable:

Example 1 - Effect of Increasing the Number of Periods:
(Assuming an annual compound rate of 10%)

Period:                       (Rate)ⁿ                       Final Value of $100

5 years                       1.6                               $160

10 years                     2.6                               $260

20 years                     6.7                               $670

40 years                     45.3                            $4,530

Quite a difference, huh?  Now let’s look at something even more dramatic…

Example 2 - Effect of Increasing the Interest Rate:

(Assuming a period of 20 years)

Interest:                       (Rate)ⁿ                       Final Value of $100

5%                              2.65                            $265

20%                            38.34                          $3,834

40%                            836.68                      $83,668

100%                          1,048,576                 $104,857,600

Small increases in either the Interest Rate or the Number of Periods have a dramatic effect on how much money you end up making.

Of course, if you Increase both variables then your rate of return grows to truly astronomical levels, like in the story of our dentist friend….

How A Dentist Got Rich Quick

By doubling up each time, the dentist was making 100% interest on each new tooth.  Plus he was getting 31 periods of compound interest (don’t include the first tooth as it wasn’t doubled!), so he could really allow his money to grow over “time”.  (About 2 hours for a full polish!)

So that’s how the formula works