The Magic of Compound Interest
As has often been said, compound interest is the most powerful force in the universe for building passive income. When I talk about making your money work for you and working hard to build a side gig that will eventually turn into passive income, investing your money wisely is a big part of that.
While I am not giving you personal investment advice, I will tell you that from my experience the market over time is composed of dips and rises, some bigger, some smaller, but the market’s overall direction has always been up.
To date, the market has recovered from every major market crash.
In today’s article, I am going to cover a subject that has everything to do with the concept behind Sleepy Money – COMPOUND INTEREST.
What is Compound Interest?
Compound interest is the addition of interest to the principal sum of an investment or savings plan.
In other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
It sounds simple but over time it adds up incredible. So incredible that Albert Einstein said:
“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
How Does Compound Interest Work?
The money you save either in a savings account, an insurance plan, or investment, earns interest. Then you earn interest on the money you originally save, plus on the interest, you’ve newly accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money.
The key here is:
- Finding a solid investment strategy.
- Steadily putting money into it no matter what’s happening.
- Letting compound interest work for you over time. These later two the key.
Why compound interest is the most powerful force in the universe
“My wealth has come from a combination of living in America, some lucky genes, and compound interest,” – Warren Buffet.
So, why did Einstein call compound interest the 8th wonder, why did one of the richest and most successful investors attribute his success to it, and why am I saying it’s like MAGIC.
Let’s take a common problem that one in every eight Americans has. A problem that they drag around with them almost their entire life, and struggle with, a problem that 50% of people say they sacrifice basic household needs, and even medication because of.
Just for the sake of this example, let’s apply compound interest to the subject of student loans, or rather saving up for your child’s college, and watch the magic of compound interest!
Let’s say you wanted to save up for your children’s college and you start putting money aside when they are 8 years old. That gives you 10 years to set aside money.
If you had an annual interest rate of 7%, which is about the average interest rate of an investment over time.
And if you put away just $200 each month for those 10 years.
After 10 years, with compound interest, you would have saved up $35,480, which is about the average you will need to pay for your children’s college.
Yes, that’s the magic of compound interest and that is what Sleepy Money helps you with.
If you start saving $200 a month when your child is 1, and you save money for 17 years with a 7% interest rate (using compound interest) you will have $79,197 by the time your child is 18, that’s enough money for college, a car, and a decent downpayment on an apartment when he/she finished college.
To build wealth, and a large investment that you can later live off of, you must use the concept of compound interest. By steadily investing in a solid interest-earning account over time all your hard work will pay off so that you can live your dreams without worrying about money.
Editor, Sleepy Money