SERIES: Investing Fundamentals Part 4 – Unleash the Power of Compound Interest

Welcome to the latest series at JosephSangl.com – “Investing Fundamentals”  Investing is consistently rated by our audience as one of the most confusing topics they face. In this series, we are going to share some foundational principles that can really help you understand investing better!

Four  Unleash the power of compound interest

Compound interest is the payment of money to you from companies you have allowed to use your money.

For example let’s say we have \$100 in an investment account that grew to \$105 in one year. This is the equivalent of 5% interest.

Now suppose the \$105 is left alone for another year and continues to grow at a rate of 5%. Will it be paid another \$5 interest when the second year is up? No! It will be paid \$5.25 because interest was received on \$105 – not just \$100. In other words, the interest money also earns interest! This is why you hear people say, “My money is working for me.”

Take a look at the below example of a \$100/month investment growing at an annual compounded rate of 12%.

Remember you are only investing \$100 each month! Even though after 40 years you will have only invested \$48,000 of your own money, your account balance will be \$1,176,477! This means that \$1,128,477 is the interest you have gained!

Now do you see the POWER of compound interest?

Where do you find investments that offer 12% return? I have found no investments that return 12% every single year, but I have found several mutual funds that average over 12% return over the past 50 years. Some years could lose 15% while others could gain 30%. You can see a list of my current investments HERE.

How to maximize your investment growth:

1. Invest enough to receive the entire company match.  By investing in an employer-sponsored retirement plan that matches some of your contributions, you could even receive a 50% or 100% return!
2. Monitor your investments at least every six months.  I track my investments at the end of every single month. This helps me understand how each one is performing and allows me to make necessary adjustments.
3. Consider investments beyond the stock market.  The stock market is just one place to invest. Consider small businesses, real estate, and intellectual property – like patents and licensing rights. Remember a higher interest rate almost always means a higher risk.

STEP TO TAKE:

• Establish a consistent investing habit. Invest every single paycheck into your retirement account for the rest of your working life. Even if you can only invest a small amount, it will add up to more than you can imagine!

RECOMMENDED RESOURCE:

•   In this book, Joe shares the steps you can take to maximize your money through investing!
• This book is also available via Amazon and Kindle.

NOTE: This post contributed by IWBNIN intern – Craig Fatt