They say compound interest is the 8th wonder of the world. They also they that those who don’t understand it, are doomed to pay it. What does that really mean?
If you have ever purchased a car or if you have student loans, you know you get a payment schedule. It is also called an amortization schedule. Basically, it says you are paying $X for Y amount of months. Each month you are paying some to principal and the rest to interest. Paying the principal is what pays DOWN the loan. All the interest you pay is for the privilege of the bank loaning you that money. We all know sending more money each month to the principal, will pay down your debt FASTER. Wonderful.
Now, when we think about investing we have our principal and off it we EARN interest. The bank now pays US for the privilege of holding our money. If I save $100 and earn $5 in interest, I know have $105 that I will earn interest on. That $5 becomes my money, my principal. Saving money is great and we all need an emergency fund, but the only way to truly grow your money is by investing.
I have said it until I am blue in the face, YOU NEED TO READ ONE BOOK ON INVESTING! You have to educate yourself. You can’t just ask your friends, or worse a financial advisor, what you should invest in. They are either going to give you their best guess or try to make money off of you. By educating yourself, you are taking the power into your own hands where it belongs. Yes, you can do it. Yes, you are smart enough. No, it’s not that hard. Reading a book is your best bet to understand what you should invest in and why.
For brevity, we will just assume that the best, long-term investing vehicles are low-cost index funds. You are not just buying Amazon or Google, you are buying a basket of companies in one shot. This way you are spreading out your risk. It doesn’t matter if you don’t have a lot of money to invest each month, the goal is to start and be consistent with it. I want you to open a compound interest calculator: Compound Interest Calculator | Investor.gov Do it with me now.
Step 1) Initial investment – How much can you invest today. Let’s say you have $100.
Step 2) Monthly contribution and Years – If I am 30, I may want to enter $100/month for 35 years.
Step 3) Interest Rate – now to be conservative, we can say 8%. The average return in the stock market is about 10%. S&P 500 Average Return and Historical Performance (investopedia.com) Interest variance just means how much it might fluctuate. If I say 2% variance, that means it could return 6% or 10%.
Step 4) Compound Frequency – let’s pick annually
Now you have a chart that pops up, hover over the chart at year 35 and you will see that you could have earned anywhere from $134,000 to $328,000. But how much did you actually invest? 420 months @ $100/month = $42,000. Now imagine instead of paying a car note, you invest $500/month for that same period, now you are looking at a million dollars. If you picked up a side hustle, or got a promotion for an extra $500/month, now you are investing $1000 over 35 years – 2 MILLION DOLLARS. Let’s say you are extra smart and your parents told you invest $500/month at 18 instead of 30, now you are now going to see around 3 MILLION.
Do you see why rich people don’t care about lambos or red bottoms? All that money could be growing for YOU. This is where you start to get excited to pay off debt. All the money that has been going to pay for your past, will now fund your future. Are you ready? You know step one is always the same, YOUR BUDGET. You have to track your expenses, cut the fluff, and earn more income over time to become financially free instead of slave to your credit card bill.
How badly do you want it? Do you need some help? Book a free goal-setting session with me and I can hold your hand. https://calendly.com/yourmeanestbff/30min
