What is compound interest?
Some call this the eighth wonder of the world, many call it their magic formula to wealth. What I have understood is that the majority of people I know have no clue what it means.
I could just tell you to invest 15% in the S&P500 and you will build riches beyond your wildest dreams. But that's not how the real world works and that would make this podcast and blog short and boring.
Just investing in the S&P 500 will create an interesting time for you when you become older so I always suggest doing your research and taking this as an educational moment. The S&P500 only rule will wipe you out if you plan on using the money at a later age so keep that in mind but if you have time on your side Compound interest is here to help you.
What is compound interest you ask? Well, I will explain in this story what it is and how it can turn a small investment into wealth beyond your dreams.
Let's say Timmy receives 5,000 dollars from his parents and listens to ChartYourFi or that random Lyft Driver that told him to just invest it in an index fund that matches the S&P500 like Vanguard VOO or Fidelity FXAIX just to name a few off the top of my head. As of today on the day of our lord...... 21 November 2022, the ten-year average for the S&P is 12.79%-14% depending on what site you visit. What is the s&P500 its the top companies like Tesla, Apple, Google, Meta, and the list goes on... Well, it's sitting at a YTD of -14.61 % right now.
Wait pause the story... you might be thinking why is this loony telling me to invest in the S&P500? well, my answer is this, if you were to buy a pair of shoes, coffee, or Prada bag, fill blank here.... would you buy them at full price or on sale. That's what I thought so back to my story before I interrupted myself.
So with the 5000 invested in the S&P 500, it would take just over 5 years to double maybe 6 at the most. So for math magical purposes and since I don't do the math that well unless it's to save a penny or make a dime out of a nickel here we go.
That 5,000 would be 10,000 in five years.
In 10 years that 5,000 grew into 20,000.
15 years have gone by and that pot is sitting at 40,000.
80,000 dollars in 20 years which means your 5,000 has created 75,000 doll hairs.
Mic drop.
Now when you guys are rich beyond your wildest dream don't forget to thank that Navy Veteran who helped you find your riches.
This will require discipline, and will only compound over time. Also, this requires the separation of all emotional connections to your money.
Another story quick, Sally who was a step up from Timmy added just 100 a month on top of that 5,000 initially invested and ended up with 250,000 at the same time. If you left that 250,000 in the bank for 10 more years that would give you 1,000,000 smackers.
A penny for my thought I would start saving. Check the IRS episode to see what you can save in your IRA/Roth IRA and traditional Retirement.
Check out the NERD Wallet calculators they are great they will help you understand and remember this was an educational segment, not financial advice.
https://www.nerdwallet.com/article/investing/investment-calculator
