How Does Compound Interest Work?

Steve Ballinger, MBA
A free video tutorial from Steve Ballinger, MBA
Millionaire Investor|Stocks|Cryptocurrency|Teaching 340,000+
4.5 instructor rating • 31 courses • 344,585 students

Lecture description

Compounding and time is powerful in a scientific manner that Einstein recognized and almost magical for us regular investors. See examples of how compunding can work in this lesson.

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Investing Success: Learn Keys From A Millionaire Investor!

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07:53:16 of on-demand video • Updated February 2021

  • Understand key investing concepts and how they can be applied in a real world setting.
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  • Invest in company stocks with an understanding of the advantages, disadvantages and risks that are involved.
  • Invest in Bonds with an understanding of the advantages, disadvantages and risks that are involved.
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English [Auto] The idea of compounding and having 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 equals MC squared guy. The theory relative only 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 in the EARN IT side. That's our goal was to be on the ernet 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 be paying 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 calculator here from money chimp dot com. So it's just that simple money chimp all one word. Look at calculators and compound interest or you type and if you google search money chimp compound interest compound interest calculator you'll get here. And I like this calculator. Lots of different investment calculators are out there. You'll feel free to use them. Try different ones play around them see what you like. I to like this one for compound interest allows me to do a lot of good kind of really easy quick one. What if scenarios as a good educational tool to demonstrate the value in the impact of compound interest. So with this calculator we're going to fill in some of these fields and let's say that were a young person word let's say 22 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 67 or retire 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 or we're 45 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 simple with their current principle let's say we're just starting out so we've got zero we've got we've got nothing saved at all we're just and started out and let's see. And an annual addition we want to do a monthly first. Let's say we want to do a hundred dollars U.S. a month euros rupees on whatever you're using pesos. You know think of it in that terms. But this just happens to be based on dollar so we're annual edition we're going to put in $100 a month which is equal to twelve hundred dollars a year. And how many years is that going to grow. Well we want to go to 67 from age 22 so that's it's 45 years right. So we're going to grow at forty five years and then interest rates it can play around with some conservative ones a little bit more aggressive ones. Let's for the sake of purposes here let's use 7 percent. You know if you start using 12 percent negative and realistic but if you lose 1 percent that's too conservative it's unrealistic to say overall it's say we're going to return of 7 percent. So a reasonable number return. I mean I believe. But you know who knows what the future holds. But this is a reasonable. How much you want to compound annually. And we want to compound one time a year of so let's say it does that. And the way to be at the end of the compounding period this should give you a lower and 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 your future value hit the Calculate button here and we end up with three or forty two thousand eight ninety nine. So about three or forty three thousand dollars by just putting in $100 a month you know for a long period of time 45 years. Let's say we did that for several hundred dollars a month let's say we did $200 a month and now we can start playing some different what ifs and arrows everything else stays the same but we're putting an extra hundred dollars a month on that grows from the 3:43 that almost doubles. More so. So six eighty five. So you know it's growing by putting that little bit extra in there. And if we get the $300 a month you know now we're three $600 everything else doing the same. Now we top off and a million dollars. So isn't that terrific. So $300 a month for a long period of time you know can get us to a million dollars right then and there. You know certainly a doable thing. Leader in your career as you earn more money or you get a higher paycheck are 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 to do the $3 a month but I don't have 45 years. Maybe I want to do this in in 30 years. You know you'll see the change the dramatic change will have on the number. So it went from a million down to 340000. Really good still rate three or 40000 who doesn't want that. You know by just putting a $300 a month. Right. For for for for 30 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 it 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 were at 30 years or 40000 What if we didn't have compound and what if we had zero interest rate. You know well where will we end up with we end up with whatever we just put in investing ourselves which would be 100 dollars over 30 over 30 years at thirty six hundred dollars a year. But that compounding helps that role. Let's say the 7 percent rate from 108 to 340. So that's the power of compounding there. So if you couple of compounding of your money with regular investing Automan investing regler investing and the time value and having time grow that over a period of time you can have tremendous returns tremendous results with your investing. And if you're short on time and you're closer are closer to a goal you know then you might need to invest more increase that annual addition. Let's say I wanted to get that million dollars and I thought maybe I needed to do $500 a month which would be $6000 a year right. You know that's a little bit bigger number. 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 had if I'm going with 30 years maybe I've already saved $50000 or more. Right. So you can start playing around with these numbers. Now you can say I'm pretty close to my million if I start with 50000 30 years $500 a month some percent interest rate. They do 7.5 Bloom probably right at my million. And there I am. So play around with calculations like this and there stand that investing is a you know in particular a successful investing is using things like the value of compounding interest in long term growth and you'll have tremendous success. But just continue to be a regular investor so you can get the advantages of both of those.