Compound Interest is the eighth wonder in the world in the eyes of a stock trader/investor. Compound interest makes a sum of money grow at a faster rate than simple interest because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually.
When Warren Buffett was 7 he read a book called “1,000 ways to make $1,000” and one of the concepts in the book was compound interest. Warren Buffet gained most of his wealth from mastering compound interest. Buffet is a master at compounding returns and capital from the businesess Berkshire acquires.Compounding is one of the reasons why the rich get richer, as their money grows when making investments in succesful stocks or businesses their money compounds year over year.
Compound Interest utilizes Momentum
After an avalanche builds up enough momentum, the snow mass becomes gigantic and can take out anything in its path. Compound interest acts in the same manner. It takes some time and effort to build up at first, and then it begins to proliferate.
Every great force in our world didn’t always begin big, Amazon didn’t grow overnight, but it took many years for Jeff Bezos to make Amazon what it is today, and if you were to invest $10,000 in Amazon on its IPO price, would be worth more than $12 million as of May 2020. That’s more than 120,000% growth.
A small amount of work must be done in the beginning to get things moving in the right direction. Compound interest starts to work in your favor once your wealth snowball is built.
Just as a snowball compounds and grows, so can your wealth.
Compound Interest Separates the Wealthy from the Poor
When owning a credit card, that high-interest APR rate is compound interest working against you, same with college loans. And this is how the big CROOK banks make money against you.
Why even bother fighting the bank when you could be beating the bank? Compounding against them to grow your wealth.
While everybody may think interest is terrible, it will make you very wealthy if you use it the right way.
Nobody makes a real fortune overnight, and nobody goes broke in one night either. The exceptions to the rule regress back to where they should be over time, That’s why lottery winners often end up broke years later.
It’s the habits that you create in your life, which will define your wealth. If you spend more than you make and can’t pay off, your credit card interest will work against you, but if you have the discipline to save to invest, not save to spend, you will get to wealth.
If your spending habits cause you to fight against interest, you’re going to fight that fight for the rest of your life. And sorry but, you’ll never attain wealth.
Compound Interest can make the middle-class Millionaires.
I always hear from people, “the stock market is a SCAM” or “I work too hard for my money. Why would I want to lose it” or “How would $10,000 get me a good return in the stock market” these are all sad overused excuses of people who are AFRAID to get rich. The truth is you don’t need that much.
Compound interest can make you a millionaire, especially if you are young! Take the median income in the United States today: $50,000 a year. Now the average 25-year-old making $50,000 a year would only need to save and invest 10% and would have a staggering $2,434,221 at 65!
I chose a 10% return because that’s what the S&P 500 averages per year; if you pick the right companies, you can even achieve millions at an earlier age. 10% is conservative and assuming you never get a job raise and strictly make $50,000 a year.
By investing in companies that are growing exponentially and paying out increasingly more cash to shareholders, an initial investment could multiply many times over in the course of an extended period. Don’t underestimate this power.
Compound Interest needs TIME to grow.
To grow your money with compound interest, TIME is needed. The longer you leave your money to grow, the larger your account balance becomes. Michael and I sold our long-term stocks back in may and realized we have time on our hands, and it was a BIG BIG mistake. When investing and compounding at a young age, TIME is on your hands. Don’t panic. Sell early because the stock market ALWAYS comes back, and that’s what separates the rich from the poor; the rich are discipline and believe in their investments, while the poor think that once the market dips, their money is gone.
A simple calculation to show the effects of time on your money is the “Rule of 72.”
The rule of 72 determines the amount of time it takes for your investment to double with the impact of compound interest.
Heres how it works
Divide the number 72 by the annual return percent.
The result is the number of years it will take for your investment to double.
For example, an index fund that averages 10% annually will double in 7.2 years. so it would take 7.2 years for a $1,000,000 investment to turn into $2,000,000.
Use Compound Interest to Your Advantage
Credit card companies use compound interest against you when it comes to debt. Credit card companies compound the interest on any unpaid balances every month. Knowing how powerful compounding can be can also compound in the other direction, which should be an incentive to pay off debt as quickly as possible.
Knowing that compounding allows you to make money from your money should also act as an incentive to put away as much as you can and not touch it for a long, long time.
SAVE TO INVEST DO NOT SAVE TO SPEND!!!
Categories: Financial Advice