The True Power of Compound Interest (and why you need to start NOW)

The True Power of Compound Interest (and why you need to start NOW)
compound interest with example

Whether you’ve never stepped foot in a bank or you think it’s too late to start investing for the future, there really is no better time to start investing and utilizing compound interest than now.

Statistically, long-term investments are anything but a gamble and with near-guaranteed results from your first portfolio – it’s a wonder why most newbies are nervous to start investing.

If you start early enough and invest regularly you to can set yourself up for financial freedom within your lifetime.

The most powerful force in the universe is the principle of compounding. – Albert Einstein

Taking advantage of compound interest is a great way to increase your success. It may sound intimidating, but it’s easy when you break it down. Combine this with dollar cost averaging and you have the recipe for success.

So what exactly is compound interest?

Compound interest refers to the principle that when you save money, as well as earning interest on the savings, you also earn interest on the interest itself. Therefore, every year that the money is in your account you are earning interest on each previous year’s interest. This means that not only are your savings growing over time, but that the rate at which they grow gets faster as well.

Whoever said money doesn’t grow on trees was dead wrong. Compound interest is essentially a source of free money.

The best part about this money tree is that the amount of money you have doesn’t matter. No doubt, having more money to invest often helps. But time is of the essence when it comes to compound interest.

Don’t take my word for it. Just check out the following example and see how all of this can translate to your money so you can learn to understand the true power of compound interest.

Just remember…

Returns are slow at first, but get huge towards the end

Compound interest at work…

compound interest
There really is no better way to start investing than now! The power of compound interest can be seen from the above example. By starting young, you can start earning interest on your money sooner and invest less money in the long run and get even better returns than someone investing more capital over a longer period.

Sam and Emily met online. They both knew they needed to start investing and thinking about the future. At age 19, Sam decided to invest $200 every month into a low-fee S&P 500 index fund which returned on average 10% per year. Then, at age 29, he stopped putting money into his investments. Therefore, contributing a total of $24,000 into his investment fund.

With all of this extra time on his hands, Sam turned all of his focus on nagging Emily on the importance of investing.

Emily finally cracked and started to invest at age 29. Just like Sam, she put $200 per month into her investment fund until she turned 65. Therefore contributing a total of $88,800. Which is $64,800 more than Sam contributed.

So, who do you think has more money in their investment pot? Sam or Emily?

Believe it or not, Sam came out ahead… $560k ahead!

I bet you had to double take there? Okay, so let me break it down for you.

why compound interest is so powerful

Sam had a total of $1,430,709 while Emily had a total of only $871,304. How did he do it? Starting early is the key. He put in less money but started ten years earlier. That’s compound interest for you!

compound interest calculator

Time beats money. Start young and you’ll be set for life.

Why is it hard to understand these accelerating returns?

This is because we are trained to think linearly: you drive twice as fast, your trip takes half as long. You buy double the groceries, you pay double the amount.

It’s hard to think exponentially. Think of using a calculator and multiplying 2 by itself again and again. 2. 4. 8. 16. 32. 64. 128. It adds up quickly.

The trick is to start as soon as possible. Waiting just means you make less money in the end. So get moving!

To Recap

Invest regularly into the S&P 500 and choose an interval that suits your income and savings schedule and STICK TO IT. By adding to your portfolio at regular time intervals, your entry price approximates the mean of the underlying market.

  • Invest every month,
  • 3 months,
  • 6 months,
  • or every 12 months.

With all that said, start investing NOW! The later you leave it, the less interest you will accumulate which will in return impact your future wealth.

Many Happy Investing,
Samuel

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