Brightside Financial

The Magic of Compound Interest, and Why You Need to Know About it

Albert Einstein once said “compound interest is the 8th wonder of the world. He who knows about it, earns it, and he who doesn’t know about pays it”. Starting the habit of saving, no matter how small it might seem, and earning interest over a period of time can create a substantial amount of wealth. Money isn’t everything, but it’s kind of important like oxygen, so why not create a habit of saving?

Imagine planting a seed and over time the seed grows into a tree which produces fruit which contains seeds. Compound interest works similarly, allowing your money to grow not just on the principal amount, but also on the interest it generates. And the result is a magnificent harvest beyond imagination!

Do you know about the Rule of 72? This is a simple calculation to determine the amount of time it will take to double the investment with a fixed interest rate. For example, let’s say we are going to save $1,000 and earn 9% interest. 9% divided into 72=8 years. The initial investment of $1,000 will become $2,000 in 8 years and $4,000 in 16 years!

Here’s another example. Let’s say we have twins. Their names are Sally and Jane. Sally starts saving $4,000/yr. at age 20 and does this for 20 years. Her investment is $80,000 ($4,000 x 20 years).

Her sister Jane is a late bloomer and starts saving at age 40 and she also invests $4,000/yr. but she does this for 25 years. Jane’s total investment is $100,000 ($4,000 x 25 years).

Assuming both twins earned 10%, Jane would have $400,000. Not bad considering her initial investment was only $100,000. However, her sister Sally would have $2.5 Million because she started earlier.

By the way, the banks know about compound interest too and if you’re feeling like you have a lot more month that paycheck, you might not be imagining things! Think about it, if you’re not paying off your credit cards each month, you are likely getting further into debt. The average interest rate on a credit card is 24%. According to the rule of 72, that means you may be doubling your debt about every 3 years. There’s a reason why your credit card company keeps raising your debt limits and you keep getting credit card offers in the mail. It may seem appealing, but it’s toxic!

Like we said in the beginning about compound interest, “he who knows about it earns it, and he who doesn’t know about it pays it. Friends in Denton let’s make 2024 the year that we get our financial house in order. Schedule your no cost consultation with Brightside Financial to see how we can help you win!

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Annuity,Life Insurance,Money 101

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