Simple vs compound interest– I always get excited about the discussion about interest rates. We will get in more detail on more interest rate topics in the future but today I want to discuss the joy of compound interest. It is the truly a very wonderful subject that has tremendous impact on your portfolio.
As Einstein once said “Compound interest is the eighth wonder of the world.” One of the smartest in the history of the world recognized this simple idea. Einstein was famous for quantum theory, existence of atoms, and the theory of relativity….I don’t know about you but those are hard concepts for most to understand. Making money isn’t something difficult for me to understand. It doesn’t take a genius for understanding Compound Interest! I like making money and this is easy to follow….As long as you save in products that pay you a return and safe.
What is the difference between Simple and Compound?
Simple interest means the interest you get on the original balance every year. An investment of $1,000 at 10% will get a return of $100 in year one. In year 5, the return on the original investment is still $100. The total with investment is worth $1,500. By year 30, you received $3,000 in returns and plus the $1000 investment. The total is of $4,000. Yawn!
Compound interest includes the value of your return by including your earnings. Basically, you are making money on your returns. If you have an investment of $1,000 will give you $100 interest at the end of year 1, in year 2, you will have $1,210 which continues to grow year of year. By year 5, your investment has grown to $1,610. By year 30, this investment is worth $17,449.
WOW! You just made an extra $13,449 over 30 years for investing smart with compound interest! There are risks in both types of investments but if you have a good investment it starts to become easy. There are some risks, but I will address that later. No investment is always safe.
Oh! There is more. Compounding becomes even better if you can improve the frequency. The value above was based on an annual return but it would be worth more if you could get a monthly return. In year one, that would be a difference of $4.71 by monthly compounding. NO big deal, right? Wrong…. $10,000 invested at 10% compounded monthly over 30 years would be $19,837 vs $17,449 (annual compounding) maybe it doesn’t seem like a huge difference, but its extra money for being fiscally smart. The 30-year value would be $19,837. It is magic! You have heard let your money work for you! This is just one investment! Can you imagine what happens if you invest additional funds every month!
Here is the visual of the different returns.
Use this government calculator at Investor.gov.
Try this…play with the calculator. Work with the calculator, adding a monthly contribution to your original principal. Figure out when your investment plan will make more than your income! This is what make it so much fun.
It is NEVER too late to start. Even if you only have a few years, it is still easier money than simple interest. Compound interest grows faster than simple interest. ?
Compound interest could eventually replace your income if you start and contribute monthly. You will see compound interest can be very rewarding. This is so exciting!!! It is almost free money for being a smart Fiscal Investor!
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