To me, the #1 easiest change to implement is simply to stop going out and buying lunch every single day at work. That first year you did make $500, or 10% on your $5K investment. But, in Year 2, you’re going to make 10% on your $5,500 invested rather than just the $5K that you initially put in.
If the dividend is $5 and the company is valued at $100, the yield is 5 per cent. The longer you invest, the more important dividends become. “For the seriously long-term investor, funding andincentives dividends are where the action is,” he says. An early reference to the rule is in the Summa de arithmetica (Venice, 1494. Fol. 181, n. 44) of Luca Pacioli (1445–1514).
I look forward to learning about the right financial tools to help build their future and set them up for success financially. For example, let’s say you have an interest rate of 6%. This means it’ll take 12 years for your investment to double. The rule of 72 is a quick, easy way to calculate how long it will take for an investment to double based on the interest rate. This compounding process repeats itself year after year, which means you earn interest upon interest upon interest. It is like a snowball rolling down a hill, getting bigger and bigger, year after year after year.
Basically you’re double dipping on return on your investments. This compounding effect can be very powerful over a long period of time. People that save early and keep adding to their savings can reap the rewards of compounding. That being said, the market almost never returns anything near the average.
If your goal is to simply find a safe place to keep the money you’re socking away for future goals, then you may be inclined to keep your money in a regular old savings account. That way, your principal contributions are protected (up to $250,000 per depositor at an FDIC-insured bank), and you won’t see your balance shrink unless you actively take a withdrawal. A statement that the “interest rate is 10%” means that interest is 10% per year, compounded annually.
And the longer you give yourself to benefit from it, the wealthier you stand to become. It’s all because of a concept called compounding. And it’s something you should aim to take advantage of.
You’ll end up putting in $60,000 in that case, but you’ll only end up with $87,000. That’s a $27,000 gain — not a negligible sum, but not nearly as impressive as a gain of $155,000. There’s another financial concept often linked to Einstein – the rule of 72.
Because compounding has such a huge impact on the outcome of money in the later years, it is crucial that you start saving early. As you test this equation you will see that even on day 20 your penny is only worth about $5000. The magic occurs in the later years since the compounding is being applied to increasingly larger numbers. Now if you are like most people, at first you might jump on the million dollar deal. But if you break out your calculator and double one penny for 30 days you will be amazed that on day 30 your penny would be worth over $5,000,000. The words compounding interest are two of the most powerful in the investing world.
If you invest the same $1000 dollars in your superannuation at a 10% return and leave it for 30 years your compounded total is $17,449. Let’s say you invest $500 a month in a brokerage account over a 20-year period. All told, you’re sinking $120,000 into your account, which is a lot of money.
I was fortunate that I had classes that taught me these lessons as early as middle school, but not everybody is so fortunate. You can make compounding interest work for you. I’d be happy to feature you next on the blog. If you’ve been reading all the way through, you’re already better than 90% of the world. Why can’t you take the 8th wonder of the world and do something great with it? If $7,000 a year can turn into $3.0 million in 40 years, imagine what it would do in 60.
That might not seem like much, but understanding that simple fact can have a major impact on your financial success. When’s the last time you saw a high interest credit card balance move much lower after making a payment? When you get into high interest debt, you are now fighting against the inevitable force of compounding interest.
Have you ever wondered at what makes an avalanche so powerful? A force so massive actually starts from a very small place. Before an avalanche can smash trees and break legs, it needed to become a snowball first, and a piece of snow before that.