The Power of Compound Interest & Investing EARLY

Generating wealth is simple.

In the most general method of generating wealth, an individual simply needs to:

  1. Spend less than they earn; thus, you accumulate savings
  2. Your savings increase
  3. You invest your savings and generate wealth

But even in this basic three-step process, many people forget to account for the crucial final step, which is investing your savings.

If you were to only put your money in a savings account at a bank, over the long term, you’d almost be losing purchasing power due to inflation (set around 2-3% annually in America). Unless your savings account is providing interest rates of 2-3%, you will be losing wealth for every year you allow your savings to be locked up in a bank. In the best scenario, your bank’s interest rate would just match inflation.

THE POWER OF COMPOUND INTEREST

Albert Einstein is often quoted as saying “Compound Interest is the 8th wonder of the world; it is the most powerful force.”

The reason investing is powerful is because of compound interest. For the past ~80 years, the stock market has averaged an annual return of roughly 10%, without accounting for inflation. This figure varies depending on who you ask, so let’s be conservative and use just 8%. If you start investing at the age of 22 and manage to put in just $500 into the stock market every month for the next 8 years and simply just STOP, you will retire with over $1.1 million dollars (assuming you retire at 65). Now $500 a month is quite manageable, and in this scenario, you only have to save and invest your money from the ages 22-30, and you are set to retire with over a million dollars. Your total investments (the actual money you contribute) totals $48,000.

Now let’s say you start putting aside money at the age of 30 instead of 22. In this scenario, you’ll have to save $500 every month for the next 35 YEARS to retire with roughly the same amount of money. The total principal would be $210,000.

So the question is, what are you waiting for?

Even just $100 a month. Or $100 a year.

It really doesn’t matter. What matters is you don’t forget step three in the process of generating wealth.

If you want to live a happy life in the future, you need to practice a little frugality while you are young. Investing for the future is the name of the game here.

The next step might be “What do I invest in?”

Ask different people and you’ll get a different answer every time: Stocks, bonds, mutual funds, ETF’s, commodities, gold, silver, Bitcoin, real estate…

Even if you want to invest in stocks, how do you know which stock to buy? Apple? Amazon? What about these new marijuana stocks that keep popping up?

The figures used for the charts above are based on the overall stock market, which most people use the S&P500 as a guideline. So, if you want to achieve similar results, I suppose investing in a cheap S&P500 index fund ETF would make sense. If all of this is too much information to process, then I suggest you read some of my other posts:

How the F do I Start Investing

WTF is an ETF?

Investment Platforms to Start Investing With


Follow me on social media! Instagram: @DowntoFinance

Other DTF Articles:

WTF Explanation Series:

If you have more questions, please feel free to reach out. I will gladly help you with any concerns, and we can hop on a call/chat if you want.

Email me: downtofinanceDTF@gmail.com


Disclaimer:

I am not a professional financial advisor or planner as much as I’d like to be. All thoughts on the DTF Website are strictly my opinions unless otherwise stated or sourced. I understand there may be errors in my writing. My articles are not meant to be offered as professional advice, as I am currently learning a lot about finance myself. Please always do your own research and due diligence when it comes to financial decisions. Money is very important! I may own some stocks discussed in this article.

 

 

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