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HOME > NO PAINS, NO GAINES > COMPOUND INTEREST
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COMPOUND INTEREST
How to invest $1 and make a million
If you have one single dollar bill in your pocket, I can explain how you can turn
it into a million dollars. It takes no more than a few minutes.
Allow me to explain it like this. You have a credit card with 9.8% interest.
You make a purchase for $1,000 and don't make your first payment for seven years.
Even if you do not make another purchase again, you will owe $1,924.05.
How does your debt almost double in only seven years?
Compound interest.
It can work against you, but it also can work for you. The key is to know where
to put your money to allow it to collect compound interest in your favor.
When I first moved to Washington, DC, I spent a lot of time at the library on 7th Street
near Eastern Market just a few blocks from the US Capitol Building. One book
that caught my attention was Robert G Allen's book titled, "Multiple
Streams of Income." The first chapter of his book goes over how to make money
using the concept of compound interest.
$1 x Compound Interest = $1,000,000If you deposited one dollar into an index fund account and never touched it for 145 years, you will have a million dollars in the bank, if that index fund averages at least 10% a year. Many naysayers will immediately say, "Sure, if you can earn 10% interest on that dollar."
I agree. If it only averages 9% interest you would only have $267,203.
No one said making money was automatic.
For the last 78 years, the S&P 500 has averaged a return of 10.27%,
dating back to 1927. If your grandparents pooled their money together and
invested only $60 in the S&P 500, they would have $122,977! Imagine
only putting away $30 each one time and it growing to six figures without
ever touching it. Do you realize how fast $30 gets spent today on nothing?
But let's talk about today. Let's say you put in $30 into an index fund and
let it grow on its own. At 10.27% in only 30 years you would have $563.
Now let's say you put away $30 a month. At that same interest for only 30 years,
you would have $65,745. That's ONE DOLLAR A DAY for 30 years.
Too many numbers? What if I said you give me $11,000 and I'll give you $65,000?
Ok, so you put away one single dollar bill for 145 years with an interest return
of 10% and you have a million dollars. You don't want to wait that long. Or
you don't trust index funds to maintain a 10% annual return. Or maybe you
want to buy some Biggie Fries at Wendy's with your dollar.
I will say there are no guarantees with investing. But there is a guarantee
if you don't invest. You are guaranteed to lose money.
If you put $10,000 in your guaranteed savings account earning 1% interest,
next year you will have an extra hndred bucks. Good job. But if inflation
goes up 3.1% like it did last year, your $10,100 is worth less than the $10,000
you had last year because of inflation. It's $100 more, but it's worth less than
$10,000. You might as well spend it while it's worth $10,000!
I know to some people all these numbers can get confusing. I'm going to be
as layman as possible. If you put away one single dollar bill into an index fund
every day (in other words, if you can afford $30 a month), just one dollar,
this is what happens:
I could create about 100 more charges changing all the different variables to show
you all the possible ways to create money out of money, but you should get
the point by now. For those who may be skeptical, I recommend you try for yourself.
I simply used the compound savings calculator at
FamilyCredit.org.
But I will do one more. If you're serious about generating some additional
revenue, income or wealth for your future, or perhaps the future of your children,
let's say you realize a dollar a day in the world of compound interest is
like going to Morton's Steak House and only ordering a large Coke.
Let's say you put away a whopping five dollars a day. That's a trip
to Starbucks, I know, but you'll see that coffee is costing you more than you know.
And we'll be conservative and only say 4% interest.
From these tables maybe you can see how compound interest can work to your
benefit. Maybe you only can invest $50 a month. Maybe your interest earned will
be closer to the S&P 500 of 10.27%. Maybe you can do $150 a month for the next
10 years, then go to $100 for a few years, go back to $150, drop
to $25 a month...
The point is investing $0 a month for any number of months nets you $0.
Putting money into a savings account that isn't drawing interest equivalent or
higher than inflation is like giving the bank money to watch your money.
The Internet has a plethora of information about investing and compound interest
and many different calulators and charts and tables and advice and this and that.
Where to start? The first thing that is absolutely mandatory is make a commitment
rather than tell yourself you'll flirt with the idea.
Using Google to do simple searches for any topic ranging from index funds, mutual funds,
and stock investing to 401k, IRA and retirement. Search for anything about compound interest
to understand how your money grows exponentially. Whatever you do, do do something.
Worse case, send me an email.
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