Compound Interest, The 8th Wonder of The World

I get it, you probably don’t have a ton of money to invest with right now. Chances are you don’t have a full time job, probably just a summer job. Interestingly enough, I’m in the same circumstance as you. But what I do have that you don’t, is the understanding of compound interest in the stock market. Compound interest WILL grow your money at a much bigger rate than you would expect it to. The only requirement is time.

What is compound interest?

You have defiantly learned what this is in the past, but let me explain in stock market terms. Compound interest is a growing rate on the money you put it, PLUS the returns you have already gotten. An example will explain better…

The overall stock market grows an average of 10% a year. If I invested $1,000 in a fund that tracks the overall market and never added any more money.

After one year I would earn 10%, so my balance would be $1,100. The second year I would earn 10% on that $1,100. Bringing my balance to $1,210.

Year 3 ending balance= $1,331
Year 4 ending balance= $1,464
Year 10 ending balance= $2,593
Year 20 ending balance= $6,727
Year 40 ending balance= $45,259
Year 50 ending balance= $$117,390

What if I add $150 a month to this account…?

Again, if I have an initial investment of $1,000 into a fund that tracks the overall market at 10% a year. EXCEPT this time I add $150 a month to it, lets see the returns.

Year 3 ending balance= $7,289
Year 5 ending balance= $12,600
Year 10 ending balance= $31,281
Year 20 ending balance= $109,822
Year 30 ending balance= $313,538
Year 40 ending balance= $841,925
Year 50 ending balance= $2,212,426
Yes, 2 MILLION DOLLARS when all you do is invest $150 a month!!

More gains

A 10% yearly return is what the market has been giving for decades now. So to say, “What if this happens, what if that happens…” is nonsense. However, a 10% return is only if you invest in the most conservative and safe way possible. Nothing wrong with it, but there is so much more potential.

A 12% to even 15% yearly return is attainable if done right. 20% can be done some years, with a special skillset. It can make all the difference over time. Investing in individual companies as oppose to the overall market will make this happen. That is exactly what we do here. Personally, I hold about 15% of my stock portfolio in total market tracking funds. The rest is individual companies that I believe in. A lot are considered “riskier,” but I’m young and that’s what I should be doing.

Financial advisors all over will say the same thing. Young individuals with little money into the market, should be in riskier stocks. We don’t have a ton to lose, but so much to gain.

Keys to understand

From this post you should have concluded 3 very important things.

Start investing now!!
It is about time IN the market. The more time your portfolio is exposed, the more compound interest it will recieve.
Investing a certain amount per month, returns you nicely later in life. It does not have to be $150 right now, maybe its $75. But, when you do have a stable income make it a few hundred… you deserve it.