Compound Interest

Compound Interest

What’s the urgency? Why does it matter when I start to invest or how much I invest?

The answer to that is simple: compound interest. “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”-Albert Einstein.

Let’s start with an example.

If I give you a penny and every day your investment earns 100%, in other words, your principal doubled; one cent, two cents, four cents, eight cents, etc., every day for a single month, how much money would you have at the end of the month?

One million dollars? Two million? More!

The total would be $21,474,836.48 in thirty one days, thanks to the eighth wonder of the world:  compounding interest!

How much to invest?

Many financial advisors will recommend investing ten to fifteen percent of your gross monthly income starting as soon as you can, at the age of 18 if possible, so you can catch the miracle of compounding interest early. You will feel the ache at first, but you must sacrifice, like Kobe Bryant, to meet your goals.  Kobe Bryant’s workout schedule was 6 hours a day, 6 days a week, for 6 months during the offseason.  That’s why his career was so successful.

Discipline is the only thing that will help you reach your retirement goals.

Return on Investment

There are many ways to invest for retirement in order to get your desired return on investment. Return on investment, or ROI, evaluates the efficiency of a particular investment.

Most people put their money into mutual money market accounts, deducting the money straight from their paycheck every month, and forget about it.. This passive method of investing will work long-term but maybe not as well as you would like due to the low ROI on money market accounts.

Historically, stock market trends have shown an average ROI of ten percent since the 1920’s with a period from 1950 to 2000 of around thirteen percent.

Savvy investors that are watching current trends and the market fluctuations of the economy will likely be able to score an average ROI of eighteen percent over the course of their career.

Others that are willing to take a little more risk in their portfolio choose to invest in real estate assets within their retirement accounts.  This is called a self-directed IRA usually but your financial advisor would be able to give you more concrete advice on this aspect because it gets rather complicated quite quickly.

Real estate investments can give you upwards of fifty percent returns on your money but generally come with much more risk so expert advice is needed when considering these investments.

How much money will I have at the end?

Investing early is so important because the suggested investment period is 30 years. So, the earlier you start investing, the earlier you will be able to retire.

The average college graduate makes $30,337 per year right after graduation and $43,179 per year on average a decade after graduation. With that trend, you will be making $140,046 in 40 years.

Investing the suggested 15% until you are 65 should give you about $5.5 million at the ten percent return rate! That’s not a bad retirement, right?

Then, let’s say that you are a savvy investor and can get 18% return.  You would have $35 million by the time you were 61 and could retire a few years early.

The Miracle of Compound Interest

Compound Interest is literally a miracle in the financial and investing community and one you should be taking full advantage of. The numbers just make sense and cents - millions of dollars worth!