December 10, 2020 • Accomplishing Goals
Build Wealth With The Power of Compound Interest
Wouldn’t it be nice to put money in an account and then passively watch it grow and grow?
That’s precisely what compound interest can do for you.
Compound interest is essentially the accelerating accumulation of interest in your savings as your earned interest becomes part of your principal and generates higher levels of interest. Here’s a pretty straightforward example: If you put $1000 in the bank at 10% interest, at the end of the year, you’ll have $1100. This will be your starting amount for the next year. That $1100 will now grow to $1210 at the end of the year, gaining you $110 vs. the 100 from the year before. See where this is headed? You can actually d o u b l e your money in just 7 years with a 10% interest rate, which is about the rate of return in the stock market over the last 140 years. Compound interest is a beautiful thing IF you start early and let it work for you.
Compound Interest Builds Financial Independence And Can Fuel Your Retirement
I understand why terms like compound interest, annual percentage yield (APY), and compounding period can be intimidating, but when we take the time to understand them, we step towards establishing financial freedom.
The power of compound interest will allow you to retire comfortably if you take advantage of it early enough. That’s why one of the ideas in Blue Collar Cash is the power of the “retirement team:” money, interest, and time. Unfortunately, money doesn’t just appear as you reach retirement, but it can magically appear over time with compounding interest.
Consider this: In my office alone, we have more than 30 blue-collar millionaires! These people are in their 20s and 30s and already don’t have to worry about finances after retirement. How’d they do it? By investing. They recognized the importance of putting even $50 each week away. Also, they took advantage of the company’s 401k matched savings plan. And now, they can work and truly enjoy their lives without fear and worry about what the future might bring because they’ve taken care of retirement.
Sadly, most people are behind on saving for their retirement. It has been shown that most don’t even get serious about it until they are in their 40’s. They quickly realize how much they are behind! My message is this: the sooner you start saving, (paying yourself, first) the sooner you can start accruing interest, and the more you’ll be able to benefit. That’s why taking the time to learn about compound interest early on, is vitally important.
College Can Delay Compound Investing
There’s one other component to compound interest I’d like to touch on. If you’re starting to think about life after high school, but you’re not quite sure what you’d like to do, keep one thing in mind: Money you invest in college is money that isn’t accruing interest for you. Loans to pay for college are even worse because they require you to pay interest (the average student loan interest rate is currently 5.8%) on top of missing out on investing.
This stat will blow your mind. Say you have 4 years of college that, all in, costs you $40-50k per year. That’s $200k that you paid THEM by the time you are done 4 years later. Hopefully, you didn’t borrow all that money that you now have to pay back. However, let’s assume you could learn a trade or a skill which actually pays YOU 40 or 50k per year, instead … now you have accumulated $200k for yourself in that same 4 year period of time. That’s a 400k swing in your net worth! That could have been the price of a house, a car, and a nicely-funded retirement account before you turn 25!
As I’ve said many times, college can be great. But when you’re not 100% sure about your path, it’s not something to jump into by default. Take a gap year to explore a handful of career options, apprenticeships, or even trade classes. You can invest some of the money you’d be spending on college, determine your goals with a bit of real-life experience, and give yourself a leg up in building comfort, peace, and freedom!
How To Calculate Compound Interest
Understanding compound interest can unlock your potential to live a more financially stable life. Yes, it’s better to start early, but it’s never too late to benefit from compounding interest.
Ready to plan your own finances? The compounding interest formula is P (1 + r/n)^(nt). P is your initial investment, r is the interest rate, n is the number of times interest is compounded per time period, and t is the time period.
Or, feel free to use this compound interest calculator.
Compound Interest Example
Let’s revisit the earnings example. If you put away $200,000 instead of going to school (this will be the P) and set the interest rate to a conservative 8% (r) per year (n = 1), then we can figure out how much the principal will grow depending on the time horizon you select. For instance, 3 years later (t = 3), the sum will grow to over $250,000:
$200,000 ( 1 + .08/1)^(1*3) = $251,942.40
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