There is magic in this muggle world after all.

An unearthly and mystical power resides in the hands of the world’s richest – and in mum-and-dad investors – capable of conjuring huge profits from the smallest of numbers.

Albert Einstein is supposed to have described this concept as the eighth wonder of the world. (The provenance of the quote is dubious, but let’s not quibble).

This wonderful thing is, of course, compound interest – one of the best set-and-forget financial tools. Warren Buffett, one of the world’s most renowned investors, attributes a big part of his end-of-career success to this secret.

The so-called Oracle of Omaha said in a recent interview in the US that he had enjoyed the “advantage” of compound interest through his “very long track record” of running investment fund Berkshire Hathaway for more than 50 years.

“The big sums start accruing toward the end,” Mr Buffet, ranked as the world’s richest person in 2008, said.

In fact, Mr Buffett never intended to get into the business of investing other peoples’ money at all. After working as a stockbroker for four years, he calculated he could live comfortably for the rest of his life on the $127,000 he had saved, thanks to compound interest.

It was only when others asked Mr Buffett to invest their money that he decided to risk it on the stock market again.

Graham Chatterton, a Melbourne-based certified financial planner, defines compound interest simply as “earning interest on interest”. In more technical terms, it is interest paid on the original amount and on the new interest you earn.

The key is to leave your money alone and watch it grow.

“If the investment is set up to re-invest, then it requires no further action from the investor to grow their savings,” Mr Chatterton told The New Daily.

From little things

To take full advantage of the strategy, though, you have to start early.

For example, your $1,000 would become $1,276 after five years if you left it untouched in a savings account with a steady interest rate of 5 per cent per year.

But if you put aside $5,000 into a bank account at age 20, and topped it up with $100 a month, you would retire at 70 with almost $330,000, assuming an interest rate of 5 per cent each year.

Amazingly, you would have to squirrel away $5,000 a year in the same account for the last 30 years of your working life to end up with the same result. A 20-year headstart can make all the difference.

Superannuation is one of the best examples of the benefits of compound interest, according to Mr Chatteron.

“For all of those working years, you are getting the benefits of compound interest, as the interest earned has to stay in your fund,” he said. “This is what makes superannuation so important for your future prosperity.”

The best way to take advantage of compound interest is to set your investment to autopilot.

“Make sure the standing instruction on any investment is to re-invest the interest or dividends,” Mr Chatterton said. “If you own shares and the company offers a dividend re-investment program then each time you re-invest you are buying more shares in the company.”

For investment property owners, compound interest could mean reinvesting rental income into another asset.

Of course, the power of interest cuts both ways. It pays to bear in mind that the damage debt can do to your bottom line through hefty interest repayments is equally mind-boggling.