What We Don't Know About Compound Interest Could Cost Us Dearly

This is a sequel to my previous post "What We Should Know About Compound Interest". In the previous post, I've made it clear about the power of compound interest and showed how it can help all of us to be a millionaire in our lifetime with just a small amount of money (it might take quite awhile, but we'll get there eventually). 

For this post, I'm gonna talk about compound interest as well but specifically about the cost of waiting before utilizing it.

We've all done it before, procrastinate before we begin to save some money. But do we REALLY know the cost of doing so? Perhaps the cost might be more than what we could imagine.

Let's again use an example to demonstrate this point taken into account the following assumption:

• Monthly contribution of $500 per month consistently
• Interest rate of 12% per year
• No money was withdrawn throughout the period

See that? Both will be a millionaire by the age of 52. Sounds great! But wait, look carefully. What this table has shown is the cost of waiting a few more years before you decide to start investing. Mr Early started investing when he was only 21 years old and asked Mr Late to start his investment journey too. But he decided he was still a little too young to think about investing and wait a few more years to start (sounds familiar?) 

Mr Early started when he was 21 years old and had been saving consistently for 6 years. Since he knew about the power of compound interest, he stopped after that. The money continued to enjoy the magical power of compound interest and multiplied. When he's 52, the money had compounded all those years and make him a millionaire! 

How about Mr Late? Well, not too good apparently. After he decided he was old enough to learn about investing, he finally started when he was 27 years old. He continued to save money, but it took him 26 years to arrive at the same destination as Mr Early. His decision to start 6 years later had cost him additional 20 years just to reach the same financial goal as Mr Early! 

"Perhaps the cost might be more than what we could imagine"

It's no wonder that our parents always remind us to start saving money even when we're young. Compound interest and time do produce wonder!

This is one of the lessons which I wish I knew when I was young. If I had started earlier, I would have been on the road to be a millionaire by now. So do spread this out to those who are still young and make him a millionaire. 

But for the rest of us who learned about this slightly later, don't give up and dismiss the power of compound interest immediately. We can still make up for it by making bigger contributions and seeking financial instrument which gives us higher yearly interest. We'll still be able to reach there with some additional effort.

And even if we can't be a millionaire, we can still help our children to save so that they'll have a million at a much younger age. Hopefully, they too will learn about the power of compound interest and be a multimillionaire themselves! So, share it out.

What We Should Know About Compound Interest

One of the life lessons that I wish I had learned earlier on in life was about the beauty of compound interest. Well, if you're clueless about what is it, compound interest is defined as the "interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan" according to Investopedia.

In fact, it is said that the genius Albert Einstein called compound interest as the 8th wonder of the world. Now that is something worth studying about! 

Basically, it means if you start saving your money when you're young in a financial instrument which gives out a consistent yearly interest and let it grow without you withdrawing any amount of it, by the time you're old, you'll be a millionaire rich!

And you don't even have to start with a lot of money!

Take a look at this table to see how compound interest works and how it can make you rich. For the sake of illustration, I'll use these assumptions and stop once it hit $1 million:

• You're contributing $250 per month which is equivalent to $3000 a year (which is realistic in my case) 
• And the yearly interests is about 10% (which is realistic as well)

There you have it, now everyone can be a millionaire in their lifetime! (you can argue a million is not a huge amount but it's better than nothing right?) Do take into consideration that you also have the potential to contribute more than $250 per month which will significantly boost the amount and reduce the time needed to achieve your target.

But is it really that simple? Of course NOT!

Now, the key component in tapping the power of compound interest is 

1. You have to discipline yourself to contribute consistently!
2. You have to discipline yourself NOT TO withdraw the money throughout the years
3. Yearly interest return from the financial instrument is consistent 

I learned this lesson slightly later in my life than I would want to. I'm currently putting in money consistently and continuously seeking financial instruments which can give me a consistent return (stock market, REITS). The above table serves as my blueprint to become a millionaire and I'm proud to admit that I've been putting more than $250 per month in order to tap into the magic of compound interest. 

To help you with the calculation of compound interest as well as the time & monthly contribution needed to achieve your financial goal, do use this simple Compound Interest Calculator.

So, what are you waiting for? Save your money TODAY and when you're old, you might be glad that you learned this lesson at some point in you life and get started.

And do share this out especially to the youth as they have the advantage of time.

p/s: The power of compound interest also works AGAINST you. So if you have debt (especially credit card), the interest from it will be compounded against you. Now guess who gets to enjoy the positive effect of compound interest in this case? The Bank.

An Introduction To Lesson To Ponder Blog

Greetings,

Welcome to my blog. This is actually my second attempt at writing blogs and I'm starting anew. As an introduction post, I'm gonna answer the following questions:

Who am I?

I'm a happily married working adult who loves to read & play futsal (indoor soccer). Born an atheist but got saved by the grace of God. Like most people do, I have hopes, dreams and ambitions.

Why am I blogging?

I've lived long enough to accumulate some life lessons which I believe are helpful and ought to be shared. Not only that, I've noticed that I often found myself repeating the same mistakes over and over again! So, I figured that it would be better if I write those valuable lessons down into a journal or a blog so I could review it from time to time to remind myself about those lessons. And that gave birth to Lesson To Ponder blog.

What will I blog about?

I will write about life lessons generally which might consists of (though not limited to) topics such as health tips, relationships, finance tips & personal development. I trust what I write about will be useful to you so as to become your life philosophy as it has been mine 

How can you leave feedback?

I encourage you to leave any comments for further discussion regarding the life lessons I've shared. If it's good enough, I might even adopt it into my life philosophy!