STEP 26: HARNESS THE POWER OF COMPOUND INTEREST

STEP 26: HARNESS THE POWER OF COMPOUND INTEREST

This post is part of a 30-day series called the 30 Steps Program to Financial Independence.

Have you ever noticed how hitting the enter button on your computer’s calculator can cause the multiplication to keep repeating, resulting in enormous numbers? That’s essentially what compound interest does. For example, if you have $100 at a 5% interest rate, after one year, you’ll have $105. You could withdraw the $5 each year and still have $100 left after 50 years, or you could let it compound and end up with over $1100.

It’s challenging to watch your money grow and not touch it, but think about it: what can you really do with just $5? Now, $1100 is a significant amount and definitely worth waiting for, right?

There are many online calculators that show how your savings can turn into a substantial sum, potentially allowing you to retire early. Some even let you include your monthly contributions.

I could provide more calculations, but everyone’s situation is unique. The crucial point is to leave your money alone and be patient. Yes, life brings emergencies, unexpected needs, children, and possibly illness. Try to find affordable solutions to your problems, be content with your current house or car a bit longer, and let your money grow through compound interest.

The principle is straightforward: the more you have in the bank, the more interest you earn. If you start small but early, say $50 a month from age 20 to age 50, it’s very manageable even for a college student if you cut back a bit on partying and dining out. After 30 years at a 3% interest rate, you’ll have $29,136.84. Starting five years later means you’ll only have $22,300. That’s a huge difference for just delaying by five years.

As the interest rate increases, so does your final amount. Those same $50 a month invested at an 8% average return rate for 30 years would grow to $74,517.97! Over time, your savings grow larger, eventually reaching an amount that can cover your living expenses, leading you to financial independence.