Did you know that Albert Einstein, without a shadow of a doubt, is one of the most intelligent scientists of our modern age? Stated that compound interest is like the eighth wonder of the world.
Today we’re going to be talking about one of my most favorite topics and that’s compound interest. You just don’t know how powerful compound interest is. As I alluded into the introduction, Albert Einstein called it the eighth wonder of the world.
And I’m going to be showing you some graphs today. Don’t worry, I’m not going to gloss you over with numbers and weird stuff and all that today. I’m just going to kind of give you an overview.
But what I’m going to do is I’m going to touch upon five major points that make compound interest a game changer, a game changer in this space. So this is a video you really need to listen to today. So let’s just dive right in.
So what is compound interest? In the short and long of it, basically the idea behind compound interest is, let’s say you invest $100,000 and you gain let’s say 10% to make it really simple. At the end of the year, your account will have roughly $110,000 in it. 10% of it you didn’t put in, which is really incredible.
Now that doesn’t sound very exciting in the first year. And I get it.
I really get it. That’s the reason why I didn’t say here’s a dollar, let’s turn it into 10 cents, $1.10 or whatever. I want to take a realistic amount and let you see what it looks like.
And we’re going to be analyzing this in Let’s say that we take that and we expand it over time. So in the next year, we’re not earning interest on $100,000. We’re earning interest on $110,000.
And that’s, that’s radical. Like, you’re like, wow, it’s so exciting about this. Wait for it.
What happens is, is at the end of the second year, you won’t have $120,000. You’ll have $121,000 because you made another $10,000 on the original $100,000 investment. And you made another $1,000 on that interest that you didn’t put in.
You didn’t contribute, which is brilliant. It’s like, that’s fantastic. It just doesn’t get any better.
Now, when you start compounding this over time, you really start seeing some really radical things here. And I’m going to be, like I said, showing you some graphs. What I’m going to do is I’m going to show you a 10-year window, a 20-year window, and a 30-year window.
And it’s really simple. What I did was I set it up. The hero of the story puts $100,000 into an investment account, and it’s earning 8.5%. Now, I know you can earn 8.5% because I do.
I earn at least 8.5%. I’m trying to approach over 10%, but I’m definitely 8.5%, and I have been probably closer to 9% now, on average, across all my investments. So, I know it’s possible is what I’m saying. After 10 years, let’s see what it’s worth.
After 10 years, just using the simple calculation of 8.5%, and you’ll see it on the screen here, it’s getting compounded quarterly. The reason why I chose quarterly is because dividend stocks will either pay out monthly or quarterly. That’s really important as we allude into the whole video here why that’s important.
The second thing is you’ll notice that we didn’t put anything else in after the initial input of cash. But after 10 years, it’s garnished $131,089 in interest that we didn’t have to earn. So, that account now is worth $231,890.41. That’s not too bad.
You can say, oh, well, Frank, oh, it took 10 years. It took such a long time. You know something? I really hope that you’re hoping to live that 10 years.
And if you are, I think about the time, some of the opportunities I’ve let slip by where I had $100,000, $200,000, $400,000 in the bank, and I didn’t invest it properly, and I let it slip away from me, and now I’ve got nothing. And I would have been a millionaire two or three times over for sure, without no doubt in my mind. I say to you, even if you start off with a dollar, because you know something? When I started my account, I started off with, I think it was $270.
That’s what I started out with, and I’m over, I’m just about to broach $130,000. I’m going to be depositing another $10,000 here very shortly. But that’s topic for another video, so make sure you subscribe.
I’ll just leave it at that. Let’s say what it looks like after 20 years. This is where it starts to get a little more exciting.
Again, I hope you’re planning to live another 20 years, because baby, it’s going to come and it’s going to go. $437,731 in interest. Now, did we put any more money into this? No.
Imagine if we were. Look out. The whole fund is worth $537,731.
Now, you could say to me, well, Frank, it’s going to be eroded over time because of inflation. Yes, inflation does have an effect. I figured out that over a course of 30 to 35 years, what $1 million will do today, and if you had a million bucks in the bank, you could retire comfortably, whether you’re young or old, doesn’t matter.
You’d have enough that every year it would be paying you about $100,000 in dividend payments, and that’s a comfortable living. That same level of living will cost you $3 million in about 30 years. So, it’s reasonable to say your money, yes, will become worth less, but don’t make it an excuse not to save is my point.
Okay, let’s take a look at the 30-year window. So, now we’re up to $537,731. Let’s look at 30 years now.
That number jumps to $1.2 million, and like I said, we haven’t put anything in but that original $100,000, and $1.1.5 million is compound interest. Over 10 times what we put in over the course of 30 years has compounded and turned that account into an account that’s worth 13 times its original investment. 13 times.
Almost $1.3 million. That’s crazy.
Let’s get into what makes compound interest so darn powerful, and I have five factors here. First one, of course, is that exponential growth. As time goes on, the exponential growth grows with time.
Unlike simple interest, simple interest just gives you payments based upon whatever revenue is in there at the end of the year, whereas compound interest is continuously looking at the balance and giving you interest on the balance. The second factor is time, and time is key as you can see. After one year, we were only able to save a couple hundred thousand dollars.
After 20 years, it was over half a million dollars, and after 30 years, just another 10 years on top of that, it was over one million dollars, so time is key. The longer you have, the greater the impact. You know, I’m 60 years old right now, and I’m chunking away for retirement, and I’ve built a plan where I can turn what I’ve got without any external forces at play, and I do have some external forces going on, and I’m hoping that they’ll pan out, but just with what I’m trying to do every day, that every day just trying to put it away and make it happen, I’m hoping to have that million dollars by the time I’m 70.
You’d say, well, 70, that’s getting pretty old, Frank. You’re right, you’re right. Shame on me for waiting so long.
I do have a plan, and I do want to enjoy living off that money when I decide to fully retire. Third point here is frequency matters. That’s talking about how often does that money get re-compounded.
When it comes to stocks, especially dividend stocks, we’re looking at the overall value of how many stocks we have. So we have 10 Coke stocks, or 100 CP Real stocks, or whatever it is. We’re looking at the dividend payment on that, and that percentage on that.
I’ll give you, for instance, right now my Coke holding is large enough now that I gain about 4 or 5 new shares every quarter. Now, every quarter, that means I’m going to be gaining the dividends more on that, those stocks. Now, I have other dividend stocks that are paying me monthly.
I have one stock that’s part of a REIT, a real estate investment trust, I think they call. What happens is they pay out monthly. Every month, I get 4 or 5, 10 new shares every month, something like that.
So what happens is I get the dividends for those 10 new shares. Now, it doesn’t sound like much month by month, but it adds up really fast. So frequency matters.
Number four, rated return. Boy, oh boy, oh boy, this is a big one. Rated return can make a huge difference on your net end results.
Whenever you have money managers involved into your accounts, or you’re, let’s say, into mutuals, or you’re into high-cost investments, or low-interest investments, so anything that erodes your return, it really slows that drain down. It’s almost like trying to drive into the wind. You ever try to drive into a really galling wind, you got to really hammer the gas pedal to get down that road? Same effect with your investments.
When you don’t get a huge return rate, it’s like having a blowing wind against your front of your vehicle, and it’s holding you back. So we want to get as high returns as possible without putting our money at risk, or too much risk, let’s say. For the final one, I’m just going to jump into it here as part of the bonus.
It’s kind of the other side of the coin, so you need to stay tuned for it. And I have already done that in a few videos, but I’m going to be delving deeper into it on how to 10x your income, let’s say. But let’s get into the bonus.
Now the bonus is the effect on debt. Compound interest is not only beneficial when it comes to saving, but it’s a huge detriment when it comes to debt. I see people who get themselves into so much high interest debt.
It’s easy to find a credit card that will charge you 30%. It’s really easy. I promise you it’s really easy to find a credit card that will charge you 30%.
You’ll find that the credit card companies will make you want to pay just enough that they’re kind of collecting their interest. So maybe they’re not compounding on the primary, but let’s say you fall behind. And let’s say you only pay the minimum payments and you start falling behind.
All of a sudden, if you have $100,000 in credit card debt, you might have $110,000 the next year or $120,000 because it’s 30%. Oh my shattered nerves, you don’t want that. So that’s one way I can say to you compound interest is saying to you, pay that debt off.
It doesn’t matter if it’s big or small, pay it off. Be wise about your debts. Yes, I carry a mortgage on my home, but I have it at a really, really low interest rate.
And even in today’s day and age, it’s still really low. It’s less than 2%. Now that’s going to change.
And when it does, I’m going to be reducing the amount of my mortgage. And when I do that, I’ll reduce how much I have to pay an interest in the long term. But I’m going to still always maximize my savings for the long term too.
So make sure that you consider the cost of compound interest on debt. I have heard stories and I will say I’m guilty of this, where I had a HELOC on my house and I paid the interest, just the interest. Now I didn’t have a really high interest rate, but when you got a HELOC of $400,000 in the house, you know something, every single month you’re paying a couple thousand bucks and it’s interest, it’s interest.
I would be rather putting that couple thousand bucks into savings, so I can get the interest from it in the long term. I did this for 18 years. I didn’t pay a cent off on that house in 18 years.
It was some financial advice I had gotten years before. You know something, it might have been good advice, but it was not good advice for me because it didn’t work. It didn’t work for me at all.
I should have been in a position where I was paying that house down and paying that mortgage down. I could have had a couple hundred thousand dollars in my hands even then. You know, this goes against you, so make sure you watch out and you pay that debt off.
Hope you’ve enjoyed this video and make sure that you do a little bit more research on why Einstein calls compound interest the eighth one of the world. It truly is. It’s a remarkable thing that either you can take advantage of or you can be a victim of and it’s up to you.
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