Do you truly understand how compound interest works?
Whether the answer is yes, no, or maybe, this episode is for you! That’s because we all need to make sure compound interest is working in our interest as best as possible!
Compound interest is magic
In fact, Einstein has been quoted as saying it is the most powerful force in the universe. It never rests. It can be working against you or for you.
Compound interest works against you in the form of interest on debt. It works for you in the form of yield or return on investments. The sooner you can have it stop working against you by paying off debts and get it working for you by investing wisely, the sooner you will reach financial freedom!
Just a basic primer on why compound interest is so awesome
Let’s say that you have $10,000. You can hide it under your mattress for 30 years and you will have…ta da…$10,000.
But, let’s say that you invest this $10,000 in an investment vehicle, let’s say a total market index fund, that returns 7% net yield every year.
So, after one year it yields 7% of $10,000, or $700. Now you have $10,700. Pretty good.
But…the next year, year 2, it yields 7% not of $10,000 but of $10,700 and so on and so forth for 30 years. So, after 30 years you would have about $76,000!
Now let’s imagine you put in $10,000 every year instead of just the first year, you would have about $945,000! Now we’re talking. If you had just saved this money and not taken advantage of compound interest, you would have only $300,000 or $10,000 x 30.
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