This month we are going to review the financial “miracle” of tax-deferred compound interest. Tax deferral provides amazing results because it employs triple compounding: It pays interest on the principal, interest on the interest and interest on the taxes you that would have paid if you were in an investment that was taxed annually.
Let me give you two examples:
1) Over 500 years ago, Christopher Columbus landed in America with two dollars. That was a lot of money in 1492. Should he put his money in the “New World” bank or the “Old World” bank? Being an astute investor he allocated one dollar to each bank.
The dollar in the Old World bank paying 5 percent simple interest would be worth $26 today. The dollar in the New World bank paying 5 percent compound interest would be worth $39,323,260,000.