Prospering from Compound Interest Accrued
Compound interest is your best friend or your worst enemy. It is interesting because the choice is 100% yours. It is as personal a choice as you can make in personal finance and folks will overwhelmingly choose that it be their worst enemy.
It is not out of ignorance because everyone is schooled at some point that compound interest is not of this world. It is referred to as THE MIRACLE OF COMPOUND INTEREST.
I am as guilty as anyone. However, I was lucky enough to have mentors who took some of my income and used this tool to build a large part of my financial security. If you are not so lucky let us look at why you need to have this awesome tool working for you ASAP.
Pure simplicity
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All you have to do to have this tool work for you is to save regularly. You need to save some money each and every month and then you need to invest it in Certificates of Deposit/Guaranteed Investment Certificate for long terms. That way you get the best rates. As you deposit the rates may go up and down but over 25 years they will average out.
Pure returns
$5000 invested at 5% compounded for 25 years will be worth $16,931.77. That is 3.386 times the original $5000. Any amount invested at 5% compounded for 25 years will be worth 3.386 times the original amount after 25 years.
If you save another $200 per month each month for those 25 years you will have 137,204.06 saved. That is 2.12 times the total of 5000 and $59,800 (299 times $200) = $64,800 you put in over the 25 years. Even 25 years from now that will be a significant amount of money.
This is for pure savings. At some point your savings accounts are about saving for things so you will make withdrawals. However some things such as retirement you save for long term. This has an added twist where compounding performs an even greater miracle.
Rule of 72
This rule simply states that you take 72 and divide it by the interest rate you are compounding your money with and you will arrive at the number of years it will take your money to double in value.
Retirement savings
Let’s take that $5000 and see how it works in a tax protected retirement savings plan. Assuming that you are in a 30% tax bracket, you will receive a tax rebate of $1500. So your original input is only $3500 out of your normal take home pay. In 25 years your balance in your retirement account will be $16,931.77. That is almost 5 times the original out of pocket expense of $3500. That is miraculous.
Our final miracle is to take that $5000 of which you receive $3500 back and deposit $200 a month into your retirement fund. Out of that $200 you get $60 back at the end of the year. Your balance in 25 years at 5% will be 137,204.06. However it will only have cost you $3500 + $41,860 (299 X $140) = $45,360. That is 20% less out of your pocket to save the same amount over the 25 years. That is a 300% return on your investment over 25 years which works out to 12% per year.
Conclusion
Trying to get rich with get rich quick scheme is like bashing your head against a post like stickman here. It feels good when you quit.
Then use the tool of compound interest. It is not much work and it is not stressful.
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