If there is a single concept about personal finance that we would encourage everyone to understand: This is it!
Compound interest plays a critical role in our pursuit of financial independence, and is the key to building real wealth and security for our future.
So let’s try and understand why someone as intelligent as Mr. Einstein believes compound interest deserves to be mentioned in the same breath as the Pyramids.
It all comes down to something that is familiar to most people: the snowball effect
All this means is that money you earn from interest, earns you interest the next time around. This simple concept can have profound impact though.
Take for example the option to get $1 million right now, or a penny that doubles in value every day for a month. A lot of people might immediately say, “Give me the million!”.
Not so fast though. Compounding interest will turn that penny into $5.4 million in 30 days, because each day it doubles what the previous day’s value was.
In this example the interest is 100% per day, which unfortunately isn’t realistic. But even with interest rates of 7% per year (a more reasonable rate), the snowball effect can be dramatic.
This means that money today has the potential to be a lot more money in the future. And the earlier you start investing, the more it will be worth!
It also means that if you’re not earning interest at the “market” rate, you’re losing money in comparison. We call this an opportunity cost, a concept that simply answers the question “could my money be earning more interest if it were invested elsewhere?”. Opportunity cost is something that we use across Previsio’s platform to help make suggestions on where you should focus your effort.
Look below to see how compound interest completely changes the game when it comes to your own retirement savings.
Without compound interest, the selected persona would need to save cents of every dollar they earned, for retirement. But with interest they only need to save cents of every dollar of their take-home pay... You tell me that isn’t a wonder!
Compound interest and investing are just one stop on the complex, and sometimes overwhelming journey through your financial life. If you have no idea what to do, or just want to let someone else to do the heavy lifting, we're here to help! We'll work together to create a personalized lifestyle plan that will help you do more of the things you want to do now, while we make sure your future is secured. Learn more about what it means to create a Lifestyle Plan with Previsio.