albert_einstein

 

Yo Albert! Tell everyone what you said the most powerful thing in the universe is!

COMPOUND INTEREST!

Now you were a real sharp dude. Let’s put this under the microscope shall we? What can you tell us about compound interest?

Basically, you take your principle balance on your investment, and add interest. Accumulate that over time and merry freaking christmas your building a snowball of wealth. The snow just keeps getting stickier as time goes on.

Have you ever built a snowball on top of a hill, (this would be your principal) then let it roll down the slope, and watched it increase in size (collecting interest)? Okay neither have I. My analogy sucks! But that’s basically what compound interest is. The principal and the interest accumulating over time.

Let’s slap some numbers up here to point out the beauty of the concept:

Take a principal balance invested of $1000 with a return of 6% annually. (I think that’s a fair percent, stock market index is said to return around 6-8% over the long-term)

Initial investment of $1000 with 6% interest = $1060

Year 2: $1060 + $63.60 = $1123.60

Year 3: $1123.60 + $67.42 = $1191.02

Year 4: $1191.02 + $71.46 = $1262.48

Year 5: $1262.48 + $75.75 = $1338.23

Fast Forward

Year 10: $1689.48 + $101.37 = $1790.85

Year 15: $2260.91 + $135.65 = $2396.56

Year 20: $3025.60 + $181.54 = $3207.14

Year 25: $4048.94 + $242.94= $4291.88 

Year 30: $5418.39 + $325.10 = $5743.49

Year 35: $7251.03 + $435.06 = $7686.09

Year 40: $9703.53 + $582.21 = $10285.74

Year 45: $12985.5 + $779.13 = $13764.63

Year 50: $17377.53 + $1042.65 = $18420.18

Year 55: $23180.54 + $1390.83 = $24571.37

Not that sexy, but that was based on a principal of 1000 bucks. Do you really think your only going to contribute that one minuscule amount of $1000 and let it grow alone? No, you’re going to sock away more coinage than that! 6% on $1000 is F#$! all. But with a larger balance you will be flexing in front of a mirror! And who knows what could happen, you may come out with a higher percentage in interest over time. But it might even be less. There are a lot of factors to consider here. Fees involved, inflation, and the rate of return will differentiate. My point here is to plant the rupees early and watch them grow. The younger you are, the better.

This is why I prefer to talk to my generation about investing. It’s awkward because when your older, compound interest isn’t going to have as great of an effect on your wealth. I hate to upset you, but you’ve lost out on some momentum by not starting earlier. Now that doesn’t mean you shouldn’t get started at all! Better now than never.

So start as early as possible! But you’re not ready to invest if you’re not ready to save. And if you have a pile of high-interest debt that’s your first priority. Think of that $1000 accumulating at a credit cards APR of 28%! SMASH High-Interest Debt before you get started saving and investing. Pay off your debts, start saving, then I will tell you where you can invest it.

AAAAAAAAQUAAAA LUNG!

 

FF$!

-Jason

 

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