How To Get Compound Interest To Accelerate Gains & Maximize Wealth Creation So You Can Accumulate The Money You Need In The Time You Have
NOTE: This page is part of the Start Investing Guide. To go through the Guide in order, go here: Start Investing Guide
On this page I want to go over why compound interest is so important and how to get compound interest to accumulate the wealth you need in the time you have.
Understanding compound interest provides a deeper understanding of how I approach growing my wealth so I can secure my financial future. Harnessing the power of compound interest is at the core of my financial plan.
You see, I don’t focus on just “making money”. My goal is to accumulate wealth to the point where I have lifelong financial security for myself and my family.
And quite frankly, reaching a level of financial security would not be possible at all if not for the power of compound interest.
As Albert Einstein said about compound interest, “He who understands it, earns it. He who doesn’t, pays it.”
I want to earn it, so I have to understand it. And in understanding compound interest, the path to reach my long term financial goals is clear. I’ll tell you exactly what I am doing so you can follow my lead.
As with everything on this site, I am not only talking about this topic in general terms… but I’ll be giving you insight into how compound interest fits into the
I recommend reading this page through in its entirety, and then using the Table of Contents to revisit specific sections and related information.
How Compound Interest Works
Before you can figure out how to get compound interest, you need to know what it is and how it works.
Here is a simple definition of compound interest:
Compound interest – meaning that the interest you earn each year is added to your principal, so that the balance doesn’t merely grow, it grows at an increasing rate – is one of the most useful concepts in finance. – moneychimp.com
Let’s show how compound interest works with an example that keeps the numbers simple:
- Initial Investment: $1,000
- Interest Rate: 10%
- Number Of Years: 30
Here is how compound interest works…
If you invest $1,000 and get a 10% yearly return on your investment. That would be $100 profit at the end of the year.
The next year starts with $1,100. So the same 10% return is now $110 in profit.
Same return on your investment, but MORE profits.
As time goes on, adding your gains to the starting balance for the next year dramatically increases your profit potential. In this case, you built your initial $1,000 investment up to $17,449. That is $16,449 in profits.
On the other hand, if you took out your profits every year you would have only profited $3,000 ($100 a year for 30 years).
So, how to get compound interest? Make an investment that produces gains, and don’t take your profits out over the long term.
How To Get Compound Interest
At An Accelerated Rate
Compound interest works because your invested money grows. And as your invested money grows… your profit potential grows as well. Since you have more money invested, you can make more money even with the same percentage growth rate.
In the previous scenario we invested $1,000 and got 10% returns over 30 years. And the results were great. Keeping our money invested led to $16,449 in profits compared to only $3,000 in profits if we took out our gains every year.
But there is a way to accelerate this growth even more.
Remember, compound interest works because as your account grows, so does your profit potential and gains on your investment. So, let’s help the account grow faster by adding $100 a month to your account.
Let’s see what would have happened with this new scenario:
- Initial Investment: $1,000
- Monthly Addition: $100
- Interest Rate: 10%
- Number Of Years: 30
Wow. By just adding $100 a month to your initial investment, you now got $213,842 in profits compared to only $16,449 without the small addition.
As you can see, growing your account balance by making even small consistent additions really pays off over time.
One great way to learn about the power of compound interest is to play around with a compound interest calculator. This is the one I used for the above calculations: Compound Interest Calculator.
Why Compound Interest Is Important
This website is about reaching a level of lifelong financial security. But it also works on the premise that most of us are getting a late start. And that means, we need to be able to accumulate the wealth we need in the time we have.
Most of us didn’t get started investing in our 20’s, and therefore don’t have 30-40 years to take advantage of the power of compound interest.
I believe it is very hard to “save” your way to a level of wealth that produces a feeling of financial security. There are only so many minutes a day to dedicate to making money and only so many budget cuts you can make to live below your means.
Therefore, I must put my extra money to work to make more money. I must invest. And since I have to invest, I need to do so in a way that grows my wealth as fast as possible.
Taking advantage of compound interest helps me grow my accounts faster. It is what makes reaching my financial goals a real possibility instead of a dream. And since I am getting a late start… I need to maximize the power of compound interest in order to reach my goals in the time I have.
Can Compound Interest Make You Rich
The power of compound interest is undeniable. But you might be wondering, “Can compound interest make me rich?”
First of all, it depends on your definition of rich. But I would definitely say you are not going to get rich without it. (Unless you win the lottery or something).
The second factor is how much money you have to start with and if you are going to systematically add to your accounts.
The third factor is how much time you have. The more time you have before you need the money from your investments the better. Remember, compound interest only works if you leave your gains in the account to make more gains in the future.
And the last factor is the rate of return on your account. Small percentage gains need more time to grow. So, if you want faster gains, you’ll need a higher rate of return.
The combination of all these factors will determine if you reach your goal of becoming rich, or not.
Here is how I look at it…
By the time I figured out I needed to be investing and taking advantage of compound interest, I was already in my 40’s. This means I was getting a late start.
I didn’t have a lot of start-up money, and had to work hard to get to the point where I had money to add to my account on a regular basis.
Since I was getting a late start, I didn’t have 30 or 40 years to wait.
This is why it became so important to find a way to beat the returns of other investment opportunities. This is the only factor I could use to take advantage of compound interest in a way that allows me to accumulate the wealth I need in the time I have.
In a way, understanding compound interest is what led to the way I accumulate wealth faster and create multiple income streams with the goal of securing my financial future.
How The Concept Of Compound Interest
Shapes My Investing Plan
Due to my late start, I needed to invest in a way that maximizes the power of compound interest. Focusing on compound interest, this turned out to be a well thought out plan combined with Forex trading for only minutes a day.
- I start my account with the money I have. (You have to get started as soon as possible).
- I plan on systematically adding to my account over time. (As we saw earlier, adding to your account on a regular basis really pays off).
- I invest in a way that allows me to beat the returns of other investment opportunities. (The higher the rate of return, the faster my wealth grows).
By investing, adding regularly to my investments and beating other investment opportunities, and taking advantage of the power of compound interest… I can achieve my financial goals in a relatively short time period.
The first two steps are pretty straightforward. But, how do I beat other investment opportunities to supercharge the effects of compound interest?
Simple, I invest in the Forex market and spend 1 minute a trading day following the simple rules of my strategically designed trading strategy.
And here is something really exciting…
The Cryptocurrency Market is proving to be the wealth accumulation activity with the highest profit potential. Excellent, explosive gains trading this market and compound interest can result in some explosive wealth growth.
So, the Cryptocurrency market is a great opportunity as well.
I hope you now understand what compound interest is and how to get compound interest in a way that maximizes your wealth creation efforts.
Up next…
To Your Wealth,
Edward Lomax
