How Powerful is Compound Interest?

So… what is compound interest?

Compound interest means earning interest on an investment, plus on any interest already earned.

Unlike simple interest, which only pays interest on the initial investment.

Albert Einstein described compound interest as:

“The eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

There’s a good reason for this, and it’s why the rich have never been richer…

To understand how compound interest works, let’s use numbers.

Let’s say that you invest $1,000 at an interest rate of 5% per year.

At the end of the first year, you earn $50 in interest, bringing your total balance to $1,050. Great!

If you leave that money in the account for another year…

You’ll earn interest not only on the original $1,000, but also on the $50 of interest that you earned in the first year.

This means that in the second year, you would earn $52.50 in interest, bringing your total balance to $1,102.50.

You’ve now earned a greater amount, at the same rate of return.

This is compound interest 101.

Add the interest earned in each period to the principal amount. You create a new, higher base on which interest is calculated in the next period.

This leads to exponential growth over time.

The longer this happens, the greater the growth will be.

The S&P 500 is a popular index fund that tracks the top 500 performing US stocks, all in one fund.

It’s averaged an annual return of around 10% since the second world war. Investors use The S&P 500 as a “savings account on steroids”.

I want to use the S&P 500 to go through some more examples of how compound interest can grow your wealth.

Compound Interest Returns

$50 Per Month Invested

• 15 Years: $20,723.52

• 25 Years: $66,341.67

• 35 Years: $189,831.90

• 45 Years: $524,125.09

How much is $50 monthly?

A few overpriced coffees each week?

Investing $50 for 45 years means you’ve invested a total of… $27,000.

It’s now worth half a million dollars, and you never made more than 10% a year.

$100 Per Month Invested

• 15 Years: $41,447.03

• 25 Years: $132,683.34

• 35 Years: $379,663.81

• 45 Years: $1,048,250.17

Investing $100 monthly will net you double the returns compared to investing $50.

Look at the jump in value between 35 & 45 years.

The moral of the story?

The sooner you start investing, the better.

$250 Per Month Invested

• 15 Years: $103,617.59

• 25 Years: $331,708.35

• 35 Years: $949,159.51

• 45 Years:

  $2,620,625.43

Yes, that’s millionaire status, all from dedicating $250 per month.

$250 is quite a lot of money.

If you have this much disposable income each month, you’re doing well for yourself.

$500 Per Month Invested

• 15 Years: $207,235.17

• 25 Years: $663,416.70

• 35 Years: $1,898,319.03

• 45 Years: $5,241,250.86

$500 is a large amount of money to invest each month, especially with economic uncertainty.

Without compound interest, you’d need to expose yourself to a huge amount of risk to turn $270,000 into over $5 million.

Einstein’s Quote on Compound Interest

Before I wrap this up, I want to break down Einstein’s quote in better detail.

He says “he who understands it, earns it. he who doesn’t, pays it.”

Well, this is what he means…

• He who understands it, earns it — The investor earns compound interest through asset appreciation & passive income.

• He who doesn’t, pays it — the borrower & saver is a victim of compound interest through .

  inflation eating away at their cash savings

Compound interest is a powerful tool that can help you achieve your financial goals.

By:

• Investing wisely

• Saving regularly

• Allowing the interest to compound over many years

You can generate significant wealth and achieve long-term financial security.

Whether you’re:

• Saving for retirement

• Paying off debt

• Investing in the stock market

Compound interest is a key factor to consider in your plans.

But, the key asset you need to see the true benefits of compound interest is time, not money.

I say this to everyone looking to build wealth with their disposable income…

The sooner you start investing, the better.

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