S3E2: The Power of Compound Interest

There are three main factors that can influence the rate at which your money compounds:

1. The rate of return, or the profit, on your investment
2. Time
3. The tax rate, and when you have to pay taxes on your interest

The foundation behind compounding interest is the concept of the time value of money, which states that the value of money changes, depending upon when it is received.  Compounding allows that money to grow.

Opportunity Cost: The loss of possible gains if an action is not chosen.

Low RiskK high-yield savings account, certificates of deposits (CDs) and money market accounts

More Risk: Stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds, Investment Real Estate

High Risk: Startrt ups, Crypto and NFT’s, Options

Indexing is available within the structure of certain specialized life insurance policy’s to provide you the upside potential of the market and a limit on the downside risk.

Compound interest is when you earn interest on top of the interest you’ve already earned on the principal amount of money.

For example, if you started with $10,000 and earned 10% interest in one year, you’d have $11,000 after one year. If you earned 10% on that $11,000 over the course of another year, you’d end up with $12,100. Compound interest is the money you earned in that second year because the interest applied to your original principal and the interest you earned in the first year.

I’ve included two links in the show notes for you, but if you want to do it manually, you’ll need to follow this formula:

Multiple your annual interest rate by your principal starting value. Add the result to the principal starting value. This is your new principal value. Repeat the process. For example, 10% x $10,000 = $1,000, $1,000 + $10,000 = $11,000, $11,000 is your new principal balance.

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