So You Wanna Be Rich: The Secret Behind Compound Interest

So You Wanna Be Rich: The Secret Behind Compound Interest

As adults, a lot of us have big dreams and aspirations when it comes things such as owning a home, driving a nice car, traveling around the world, etc. The media like to sells these ideas to us, but most of the time we find ourselves saying things such as, “If only my job paid more,” “If only I won the lottery next week,” “There is no way I could ever save enough to afford _____.” While these things would certainly help you achieve what you want, they are not the only solution! Most people, especially teenagers and young adults who are fantasizing about driving a Ferrari or owning a mansion, have a resource that is often undervalued, the resource of TIME. Now you might be thinking to yourself, everyone has TIME, why is time so important? It’s important because it is the factor that drives compound interest, a magical concept that people don’t take advantage of, and often do not understand.

Let’s look at the definition: The addition of interest to the principal sum of a loan or deposit is called compounding. Compound interest is interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accumulated interest.

Looking at that definition, you may be confused, and trust me, you’re not the only one. Let’s look at a easy example:

Say you have $100, and your account earns 10% a year, or simply: $10.

Now after two years, in theory you will have now earned 20%, or simply: $20.

However, you earn interest on the $10 from the first year, and that goes into the second year, so at the end of Year 2, you actually have: $121.

I know what you’re thinking, big deal, I made a whopping $1 extra over two years, which when you compare the simple interest ($120) vs compound interest ($121), is basically nothing. Look back at what you started with though, $100. In the two years, you made an extra 1%. At $100, an extra one percent is only a dollar, but if you have $1m, that extra one percent is ten thousand dollars.

The point of this concept is no matter how much money you start out with, the more you save, the easier building wealth becomes. If you look at the stock market from 1950 to 2016, the average return is about 7% a year. This means for every $100 you invest, you can expect to get about $7 back annually. Some people decide to not invest, and leave their money in a bank account. The average savings account at banks pays about .01%, or roughly ten cents per hundred dollars. This means investing, on average, pays 70x MORE than keeping your money in a bank account.

Still not convinced? Let’s spice this up just a bit more. A lot of investments will pay what’s called a “dividend,” which is basically just a reward that is given to shareholders based on company performance. Most dividends are about 1-3% a year, and are paid monthly, quarterly, or annually. Add this return to your average 7% return, and you could be getting upwards of 10% return on average.

Why is all of this stuff important? Refer back to the beginning where we talked about buying a house, car, traveling, etc. If you have $1m in investments, and your getting a 7-10% return, you can expect to earn between $70-$100k a year, without lifting a finger. Now a million dollars is a lot of money, how could you ever expect to save that much?! You don’t have to, in fact, you don’t even need to save half of that. If you start saving now, and let compound interest do its magic, you’ll see $1m is more achievable than people realize. And if you have TIME, that number could become much bigger…

If you’d like to start investing, companies such as TD Ameritrade, JP Morgan, Vanguard, or Scottrade are great places to start!

compound interest calculator:

10 Struggles Every College Senior Knows to Be True

By Katie Sears

It’s that time of year: College graduation. For three and half years all you’ve wanted to do is get as far away from campus and school-related responsibilities as possible;  now you’re crying yourself to sleep worried that the ‘real world’ might be a little bit too real for you. Staying focused in school while simultaneously trying to figure out the rest of your life seems damn near impossible, and no amount of ‘You can do it!’s from mom will help.

If it makes you feel any better, we’re all in the same rickety boat.

  1. Finding a job is a Catch 22.
    You’re trying to find a job so that you can make money, but you need money to get to the job. Moving out, storing your stuff, and finding a new place to live all require a significant amount of that you probably should have started saving as a freshman, but instead blew on BeatsByDre headphones and 3am Taco Bell runs.
  2.  Student loans have to be paid back. Like, now.
    Financial aid is great while you’re in school, but the day you graduate marks the day you will forever be indebted to the government and to your university.
  3. You realize you may never, ever see your college friends again.
    It seems like everyone you know is moving to a far-away state, country or continent. The friendships you’ve fostered over the last four years will abruptly end, and it’s one of the saddest things about being a senior.
  4. Senioritis.
    Imagine the senioritis you felt in high school and multiply it by ten million. Then add 40. I wouldn’t wish the last five weeks of senior semester on my worst enemy.
    living life
  5. Final Exams.I’m not just talking about the exams during finals week that cover the last semester; I’m talking about CapStone classes, major field tests and other exams that will likely determine the rest of your life, like the MCAT, PCAT and the bar exam. It’s even worse when the test costs money. I thought paying to take a test in a classroom was called tuition?
    hate everything
  1. Not being confident about your degree.
    That moment you realize you actually hate your degree and it’s not what you really want to do. And then the moment you realize you are really passionate about your degree and don’t want to work in any other field. The daily back-and-forth is exhausting.
  1. You have a lot of stuff. And only one car.
    While you’ve spent the last three years decorating your home to better resemble the one you left behind, you never really considered the massive amount of space these things take up. Combine that with the fact that you only have one car, and moving becomes a lot more daunting than it already was.
  2. Your dream job most likely won’t be your first job.
    You start accepting that your dream of changing the world and becoming one of Forbes’ 40 under 40 might have to wait a couple of years. Suddenly, just being an assistant doesn’t sound so bad if it means you’ll have a paycheck at the end of the month.
    pay day pickitup
  1. Time is running out.
    There are still a million things you haven’t done on campus/in town/ in your state and suddenly you want -no NEED- to do all of them, like that popular hike you passed up on because you were hungover or that weird restaurant that sells avocado-flavored ice cream. FOMO starts to seriously set in at this point.
  1. We see articles like this:
    Why Millenials Have a Tough Time Landing Jobs – CNBC
    Millenials Have Nothing to Celebrate When it Comes to Employment – Forbes
    40% of Unevmployed Workers are Millenials – MarketWatch

All. The. Time.