Let us break this down
1. You add money to your investments with 5% annual return
2. Add more money
3. Now you give it some time
4. And soon the 5% starts to multiply every year
5. More years go by and you add 5% on 5%
6. All equals Compound Interest #moneyface
Now let us put this together, you smart little Emoji you have saved a ton of money and are ready to invest it, now you add money to your investment and you give it some time, as you want the money to grow. Year over year you are getting 5% and it multiplies on top of each other; this all equals compound interest and you got money in your eyes.
Compound Interest, learn it, love it, live by it!
Some of you may have heard about compound interest before in school and probably disregarded as soon as the class was finished, just like I did until I learned its importance. So lets do a quick refresher of compound versus simple interest.
• Compound is defined as “things composed of two or more separates elements” So in financial case, think of the “more” as interest in our case, which essentially is $$$.
• So “Interest on Interest”… basically it is “interestception” and you won’t want to get out of it.
• Simple Interest: Is just interest once and never on top of each other
• Example: November 5th, 1626 Manhattan sold for $24.00, now lets look at how much it would be worth if there was simpler interest and compound interest of 7%.
• Simple Interest: 7%*$24.00= $1.68*390 years= $679 (Go by yourself an iPhone… the 16gb one….)
• Compound Interest: 7%*$24.00= $1.68+$24.00=$25.68*7%(Year 2)… do this for 390 years and you would end up with $1,592,222,000,000 (that is Trillion with a T, private island anyone?)
Clearly compound interest is the way to go, so how does this relate to Goal Planning? Well picture this you have a goal to buy a house in 10 years, or want to have enough money to travel the world and take some time off in 5 years. Each month that goes by, is a month that you could have started compounding your money. The market works on compound interest not on simple interest. This is why it is so important to start early at a young age to set up your future, the longer your runway the better chances you have for taking off.
This is why we take the time to sit down and properly goal plan with our clients. Often we think we don’t have enough money to invest or are lost in this confusing market but we know what our goals are. Take advantage of compound interest and start today.
We understand that investment isn't about risking the money but building it to reach a goal! So to sum it up, simple interest=bad compound interest=good. Learn it, love it, live by it! If you would like to learn more please reach out and we will match you up with one of our partnered advisers.