In this Approximately 5-7 minute article:
- The 8th wonder of the world, compound interest. What is it, and how can you use it?
- The population and compound interest.
- Basic examples of compound interest.
- Compound interest with contributions.
Compound interest is more than likely one of the most useful tools that Millennials and Gen Z can use. The reason for this is that we have an enormous amount of time on our hands! Einstein once called it the 8th wonder of the world!
Compound interest is the eighth wonder of the world. He who understands it earns it… he who doesn’t… pays it.Albert Einstein
Compound Interest and the Population
In the 1700’s, the earth was inhabited by just over half a billion people. In the 1800’s the world’s population broke a billion. In the 1900’s the rate of increase started to pick up and over the span of 100 years the world population increased by nearly 5 billion! Check out today’s world population here!
Obviously, this phenomenon was influenced by numerous reasons, however it’s clear that the more people there are on the earth, the more opportunity there is for children to be born.
For example, say there are 2 families of 2 people. We currently have 4 people.
Each family then gives birth to 4 kids each. Now there are 4 parents and 8 children.
If you calculate this enough times, the end result eventually amasses to a number far greater than the original 4 people we started with.
Obviously, this would take time to happen… it wouldn’t be something that occurs over night. Compound interest with money works in a similar way.
Time to Talk Money
Let’s say that today you decide to invest $1,000, and you expect that each year that $1,000 is invested, you’ll receive 7% interest (an average return one might expect from the stock market based on its history).
After 1 year, you’re left with $1,070 ($1,000*0.07 + $1,000)! You’ve made $70 by letting your money do the work for you, and you decide to leave your money in the same account for another year!
After year 2, your balance is $1,144.90 ($1,070*0.07 + $1,070)! This year you made more than $70 off of that same initial $1,000 investment. You actually made $74.90! Seeing that this worked out even better for you in year 2, you decide to leave the money in there for another 48 years.
50 years down the road, your initial investment has grown to $29,457.03! This is the power of compound interest!
Now let’s take it one step further and say that you decide to contribute $1,000 a year to that same account with the same average of 7% interest. In other words, each year you contribute another $1,000. At the end of 50 years your investment has grown to $435,985.95! That’s not bad at all!
Compound interest works best over time, and the more time you have on your side, the more your investment has a chance to grow! This is why you have an advantage if you are young.
Be sure to check out our upcoming articles on how you can become a millionaire for just the cost of one meal a day and Roth IRA’s. We’ll touch on this concept again.
Compound interest is more than likely one of the most useful tools that millennials can use. The reason for this is that we have an enormous amount of time on our hands!
If you’re interested in testing out compound interest scenarios, click the link here for an online tool I love to use!
Still have questions? Reach out!