Compound Interest 101
Compound interest is a powerful concept in finance, and it is the process by which the interest that you earn on your investments is added to your principal, so that you can earn interest on your interest. This can have a significant impact on the growth of your investments over time, and it is an important concept for investors to understand.
To illustrate how compounding interest works, let's consider an example. Imagine that you invest $1,000 at an interest rate of 5% per year, and you do not make any additional contributions to the investment. After one year, your investment will be worth $1,050, because you will have earned $50 in interest.
Now let's assume that you leave the investment untouched for another year, and it continues to earn interest at the same rate of 5% per year. At the end of the second year, your investment will be worth $1,102.50, because you will have earned $52.50 in interest, which includes the $50 in interest earned on the $1000 plus an additional $2.50 in interest on the interest that you earned in year 1.
This is the power of compounding interest, and it is an important factor that can help to accelerate the growth of your investments over time. The longer you leave your investments untouched, the more they can benefit from compounding interest, and the more they can grow.
To maximize the benefits of compounding interest, there are a few key things that investors can do. First, they can invest in assets that offer a higher interest rate, such as stocks, bonds, or real estate. Second, they can invest for the long term, and avoid making frequent withdrawals or selling their investments, as this can reduce the amount of interest that they earn. Finally, they can make regular contributions to their investments, which can help to compound their interest faster and to accelerate the growth of their portfolio.
Here are some more examples of how much someone could earn by investing $100,000 at an interest rate of 7% per year, depending on their age (this is just for illustrative purposes):
If someone invested that at age 18 and leaves their investments untouched until age 68, they would end up with 2.9M
If someone invested that at age 30 and leaves their investments untouched until age 68, they would end up with 1.3M
Here are some more examples of how much someone could earn by investing $1000 per month at an interest rate of 7% per year, depending on their age:
If someone invested that at age 18 and keeps investing every month until age 68, they would end up with 4.9M
If someone invested that at age 30 and leaves their investments untouched until age 68, they would end up with 2M
As these examples show, the earlier someone starts investing, the more time their investments have to grow, and the more they can benefit from compounding interest. By starting to invest at an early age, someone could earn hundreds of thousands of dollars in additional interest, and their investments could grow significantly faster than if they started investing later in life.
To accelerate, focus on increasing your cash flow. For instance, higher paying jobs can help you gain more compound interest in the stock market in several ways. First, higher paying jobs typically provide more disposable income, which can be used to make larger contributions to your investment accounts. By making larger contributions to your investments, you can accelerate the growth of your portfolio, and you can earn more interest over time.
Second, higher paying jobs often provide more generous employer-sponsored retirement plans, such as 401(k) plans or pension plans. These plans can provide additional contributions to your investment accounts, and they can help to increase the size of your portfolio.
Third, higher paying jobs may provide access to more lucrative investment opportunities that are available to accredited investors.
Overall, higher paying jobs can provide you with the financial resources and investment opportunities that can help you gain more compound interest in the stock market. By taking advantage of these opportunities, you can grow your investment portfolio more quickly, and you can achieve your financial goals more easily.
Note: Please remember, I am not a financial advisor; find yourself a good fiduciary advisor if you need specific help. Go here to get started.