How Does Compound Interest Work?

The idea of compounding and having our investments grow over time is a core critical aspect for any type of investor. Albert Einstein actually knew this and has some famous quotes along that. You know, Albert, of course, is the E equals MC squared guy. The theory, relatively a brilliant person. And he had some quotes, one of which is, you know, compound interest is the eighth wonder of the world. He understands it, earns it. He who doesn't pays it feel from Albert Einstein. And we certainly want to be on the earn it side. That's our goal, is to be on the earnings side. He also said that compounding was the most powerful force in the universe is compound interest. So very fascinating from a very, very smart guy, you know, recognizing the mathematics behind compounding and compounding over a period of time. So let's take a look at some examples of compounding how they can be kind of motivating for us and see what that really means for us, the intrepid investor. OK, I'm looking at a calculator here from Money Chimp Dotcom. So it's just that simple money chimp, all one word, look at calculators and compound interest. Or if you type in, if you Google search money, chimp compound interest or compound interest calculator, you'll get here. And I like this calculus. Lots of different investment calculators are out there. Feel free to use them, try different ones, play around them, see what you like. I happen to like this one for compound interest. It allows me to do a lot of good, kind of real easy quick one. What if scenarios. And it's a good educational tool to demonstrate the value in the impact of compound interest. So this calculate we're going to fill in some of these fields and let's say that we're a young person word, let's say twenty two years old and we decide we want to save for long term for our retirement. And let's say we're thinking maybe we'll retire at sixty seven retirement, a typical retirement age or a traditional one. You might want to of course, retire early. I certainly do. But let's say you're going to save over. We're forty five years towards retirement. So then you start putting in these inputs and you'll see how much you have in the end as far as your future value or what you'll end up with. So simply, it's their current principle. Let's say we're just starting out. So we got zero. We got we've got nothing saved at all. We're just didn't start it out. And let's say and an annual addition we want to do let's think monthly first. Let's say we want to do one hundred dollars us a month, euros, rupees, Yune, whatever, you're using pesos, you know, think of it in that terms. But this is perhaps to be based on dollars. So we're annual edition. We're going to put in one hundred dollars a month, which is equal to twelve hundred dollars a year. And how many years is that going to grow and. Well we want to go to sixty seven point twenty two. So that's, that's forty five years. Right. So we're going have that grow at forty five years and then interest rates. You can play around with some conservative ones a little bit more aggressive ones. Let's for the sake of purposes here, let's use seven percent. You know, if you start using twelve percent like it's unrealistic, but if you use one percent that's too conservative, that's unrealistic too. So let's say overall, let's say we get a return of seven percent. Some are reasonable of no return, I believe. But who knows what the future holds. But this this is this a reasonable how much you want to compound annually and we want to compound one time of year. So let's say it does that and we only want to be at the end of the compounding period. This will actually give you a lower, more conservative number than if you did the start of each compounding period. So some conservative numbers here in this part. All right. So let's see what we end up here as far as the future value. Hit the calculate button here and we end up with three hundred forty two thousand eight ninety nine. So about three or forty three thousand dollars by just putting in one hundred dollars a month for a long period of time. Forty five years, let's say we did that for one hundred dollars a month. Let's say we did two hundred dollars a month and now we can start playing some different What-If scenarios. Everything else stays the same, but we're putting an extra hundred dollars a month and that grows from the three forty three that almost doubles more to six eighty five. So, you know, it's growing by putting that little bit extra in there. And if we get to three hundred dollars a month, you know, now we're thirty six hundred dollars, everything else staying the same. You're now we top off in a million dollars. So isn't that terrific. So three hundred dollars a month for a long period of time. You can get us to a million dollars right then and there. It's certainly a doable thing later in your career as you've earned more money or you get a higher paycheck, or if you're able to control your expenses, you can even do better than that and really start looking at big numbers or make changes to this. Like, let's say I don't have I want to do the three dollars a month, but I don't have forty five years. Maybe I want to do this in in thirty years. You know, you'll see the change, the dramatic change they'll have on the number. So it went from a million down to three hundred forty thousand. Really good. Still right through to forty thousand. He doesn't want that, you know, by just putting a three hundred dollars a month. Right. For, for, for, for thirty years. And that's just growing there. And then the additional money you invest will grow on top of that. So the idea behind that is compounding is that powerful force in the world is, as Einstein talked about, you can really make a difference as far as you know, over time with your interest as it continues to grow and grow upon itself. I mean, just think of this as we're at thirty years or forty thousand. What if we didn't have compounding? What if we had zero interest rate? You know, where will we end up with? We end up with whatever we just put in investing ourselves, which would be one hundred eight thousand dollars. Over over 30 years at thirty six hundred dollars a year, but that compounding helps that grow at, let's say, the seven percent rate from one hundred and eight to 340. So that's the power of compounding there. So few couple compounding of your money with regular investing, automatic investing, regular investing and the time value and having time grow that over over a period of time. You can have tremendous returns, tremendous results with your investing. And if you're shorter on time, maybe you're close to retirement or closer to a goal, you know, then you might need to invest more increased that annual addition. Let's say I wanted to get the million dollars and maybe I needed to do five hundred dollars a month, which would be six thousand dollars a year. Right. That's a little bit bigger. No. Well, then I'm getting that five hundred sixty six thousand. So you'd have to keep increasing that. Or maybe if I started already, if I've if I'm going with 30 years, maybe I've already seen fifty thousand dollars or more. So you can start playing around with these numbers. Now you can see I'm pretty close to my million if I start with fifty thousand thirty years, five hundred dollars a month, some percent interest rate I do seven point five boom. I'm probably right at my million and there I am. So play around with calculators like this and understand that investing is in particular a successful investing is using things like the value of compounding interest and long term growth. And you'll have tremendous success. But just continue to be a regular investor so you can get the vantages of both of those.