Why The Rich Get Richer and How To Take Advantage Of It Yourself

Growing your money as you get older will prove to be a large component of achieving your financial goals. You probably know that investing is a great way to do this, but you may not know the full breadth of benefits investing your money really provides.

You probably know your money grows when it’s invested (though there is risk involved), but there is another component of investing your money consistently for a long period of time that takes your wealth-building to the next level.

Compound Interest

Einstein is believed to have said that compound interest is the 8th wonder of the world, and he said it for good reason. According to www.investor.gov, “compound interest is the interest you earn on interest. This can be illustrated by using basic math: if you have $100 and it earns 5% interest each year, you’ll have $105 at the end of the first year. At the end of the second year, you’ll have $110.25.”

Let’s set up an example with a compound interest calculator so we can see first hand the power compound interest can have on your money. You can find the compound interest calculator I used here.

In the example below, we took a 20-year-old and set up a model where she invested $500 a month until she was 60. We calculated an annual return of 7%, which is very modest considering the S&P 500 has averaged an annual rate of return of around 10% since its inception.

With our model, our 20-year-old would have $1,197,810.67! That is truly incredible.

What this tells us is that if we invest routinely over a long period of time our money will grow incredibly fast. If you take a look at the above graph, the total money you would have invested over that period is only $240,000! The remaining $957,810.67 is all growth from compound interest.

This tells us that if we stay diligent with our investing we have an incredibly high chance of winning big with our money. History would tell us so, and remember, the 7% annual growth we estimated is below what the S&P has averaged since inception.

So why don't more people take advantage of this phenomenon?

It takes discipline to invest regularly for a long time. Remember that diet you kicked in just a week or that gym membership you only used until February 15th? Being consistent is hard!

It also takes short term sacrifice for the long term gain. As Dave Ramsey would say, it takes living like no one else so you can live like no one else. I also believe not enough people are educated on the power of compound interest. They believe that being wealthy is just for CEOs, celebrities, and athletes. This is simply not true.

Good money habits aren’t just about math. That’s the easy part. The hard part is the emotion behind money. The discipline it takes to begin with the end in mind. The foresight to sacrifice now to prosper later.

I hope you see now that if you implement these practices, particularly early in life, you can take advantage of compound interest and win with your money.

Talk soon,