Everyone loves to say compound interest is magic because one dollar turns into thirteen grand. The magic is simple: start early and let time do the heavy lifting.
Do you know what Compound Interest means?
It's when you invest money or when you put money into a savings account (or a certificate, or a treasury, whatever it may be) and the interest that the money that you deposited stays in that account and that money earns interest.
So let's just say you make a deposit of $10,000 and now that $10,000 earns interest for the month and the interest earned stays in the account. So now the $10,000 plus the interest earned begins earning interest. That's known as compound interest.
Albert Einstein also said: "The most powerful force in the Universe is compound interest."
Well, may the force be with you!
It’s the force of:
- Starting early
- Consistency (persisting no matter what the market is doing)
- Time + compound interest doing the heavy lifting
“Money makes money. And the money that money makes, makes money.”
Dave Ramsey said about compound interest:
"There's a key to building wealth that can absolutely change your life if you get the concept early. I'm talking about compound interest."
If you’re in your 20s and thinking “I’ll start later when I make more money”… don’t. $1k/month now beats $3k/month in your 40s.
The best time to plant a tree was 20 years ago. The second best time is today.
Another way to think about compoun interest as a snowball effect.
You start out with a small snowball that you pack tightly the size of your fist. Then you add more snow to it. Once it get big enough, you start rolling on the ground. Then send it down the hill. As it picks up speed it picks up more and more snow...
Compound interest works the same way with your money. Start out small, over time it grows and grows faster and faster. Packing on top of the existing money.
Compound interest can not only be applied to money, but the rest of your lif as well. Chris Bailey from chrisbailey.com, put it very well:
Volunteering. A few summers ago, on a whim, I decided to volunteer for a week-long camp for kids with cancer because I felt like giving back. Now, from that initial one-week investment, I have countless new friends, some of my most favorite memories, and a brand new perspective on how lucky I am. Every time I have volunteered, the time I invested has compounded incredibly.
Relationships. Shallow relationships are not rewarding. One of the things I discovered (the hard way) is that investments in relationships and friendships compound. Now that I’ve learned that lesson, I invest a whole lot more into the relationships I have. When you’re in a relationship or friendship where your investments make the other person happy, they can compound exponentially.
Networking. I capital-H Hate corny networking where everyone hands out their business cards and pretends to be interested in one another. But genuinely meeting new people, especially in a work setting, is a time investment that compounds. When I was looking for a full-time job last summer, I landed an incredible marketing internship because of the people I knew in my network. That one summer made all of my networking efforts worthwhile. Another example: I kept in touch with a woman who works in Communications at my University after I graduated. When I started this project, she helped connect me with countless people who have helped get the idea of A Year of Productivity out. I can rhyme off more examples, but I think you get the idea.1
Reading. The great part about reading is that after you read a book, the skills and knowledge that are inside of of the 300-some pages you just read is now in your head, and you can then read yet another book that builds on top of that pile of knowledge and skill. And over time, as you keep building, your time investment compounds more and more.