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How’s it going today guys i hope you’re having a fantastic day so in this video here we’re going to be talking about compound interest what exactly compound interest is and how you can earn compound interest and if you guys are interested i actually have a whole blog article that goes along with this over on the investing simple blog that’s just investing simple
Dot blog if you’re looking to check that out i’m gonna link that article up down in the description below it’s going to talk more about earning compound interest and one of the best methods of doing this so when it comes to earning interest or a return on your money there are two types of interest you can earn first of all you have compound interest the one that is
Most interesting to people no pun intended and then second of all we have simple interest so you either have simple interest or compound interest and with compound interest you’re able to earn interest on interest but with simple interest it’s just interest on that initial principle or deposit so let me go ahead and give you guys an example of this using numbers
That way it makes more sense what i’m talking about here so if you invested ten thousand dollars and you were earning 8% per year of simple interest you would earn $800 in interest every single year year one would be eight hundred dollars year five would be eight hundred dollars year twenty three would be eight hundred dollars every single year you’re earning the
Same amount of interest and over those 25 years your account would grow in value from $10,000 to $30,000 now compound interest on the other hand allows you to earn interest on your interest and if you had that same investment of $10,000 at 8% but earning compound interest over 25 years your account would grow to sixty eight thousand five hundred dollars instead of
Thirty thousand dollars so that’s the difference right there between earning simple interest and compound interest with simple interest it was just eight hundred dollars every single year but with compound interest you earn eight hundred dollars the first year you run around eight hundred sixty four dollars the second year the third year you earn nine hundred thirty
Three dollars that fourth year you earn one thousand seven dollars because you’re earning interest on that interest you earn eight hundred dollars in the first year and that next year you’re going to earn eight percent on your original ten thousand dollars in principle as well as eight percent on your eight hundred an interest from the first year i know it’s kind
Of a complicated concept to understand but really all you have to understand is that it is interest being paid on your interest and this allows your money to grow at an exponential rate not a linear rate so as far as linear goes it’s just going to be in a straight line it’s going to be gradual growing at the same pace but if you guys have ever seen an exponential
Growth curve i’m sure you know it starts off slow but it begins to grow at an even faster rate the more time passes and that is something that we call the snowball effect with compound interest you’re gonna be taking advantage of the snowball effect and what that means is that these small and seemingly insignificant results are going to have a massive effect or
Massive change over time so that little bit of interest you’re earning every single year that interest on your interest it’s going to have a massive effect on your savings and on your investing account years down the road and that right there is the reason why most people are not interested in compound interest because you have to have a lot of patience you have
To understand this is a long-term investing strategy and you’re gonna see most of the fruits of this years down the road 10 15 20 years down the road for people who are patient and understand the true power of compound interest you can reap the benefits but for people who are impatient and they can’t see the long-term picture they’re gonna end up wasting a lot
Of time and they’re gonna wait until later in their life to begin investing now as i’m sure you guys can understand if you want to take advantage of compound interest the best way to do that is to give yourself more time a lot of people refer to compound interest as the time value of your money it’s not about how much money you’re investing it’s really about how
Much time you’re allowing your money to grow and so young people are at the biggest advantage young people have the most time to allow their money to grow the most amount of time they can allow themselves to earn interest on interest and as a result they can earn the most money through compound interest and as a young person if you are skeptical about this and you
Don’t believe me talk to an older person and ask them what do you think i should be doing in my 20s as a young person i guarantee you most of them are going to say save more money and invest that money you’re gonna thank yourself years down the road in fact warren buffett the most successful investor of our time attributes the majority of his success to compound
Interest he says my wealth has come from a combination of living in america some lucky genes and compound interest and einstein also referred to this as the eighth wonder of the world so it’s so important that you guys understand what compound interest is and how to earn it and apply it so how do you earn compound interest there’s a couple of different ways you
Can do it some of them are really good and some of them are pretty lousy first of all one way you can earn compound interest is through your bank account through a savings account through a checking account through a money market account or through a certificate of deposit now is this a good way to earn compound interest absolutely not you’re actually not even
Going to be outpacing inflation when you’re earning compound interest through a bank account so i would not recommend doing this with your money don’t put your money in the bank and think you’re gonna become a millionaire through the interest earned from your checking account and if you guys don’t believe me go out there and ask a millionaire how much money they
Made from their bank account and they’re gonna tell you that they invested their money in the stock market or real estate or something else they didn’t just put their money in the bank save their money let it sit there and build up a million dollar net worth so the best way to visualize these interest rates is to figure out how long it would take your money to
Double given that interest rate and you can calculate this very easily by looking at something called the rule of 72 and what that means is if you take the number 72 and divide it by your interest rate from whatever the investment is that’s going to tell you how many years it’s going to take to double your money at that given interest rate so take the bank account
For example the average checking or savings account pays about a 0.05 percent interest rate so take 72 divided by 0.05 and you will find it’s gonna take 1440 years to double your money so if you have $10,000 in your checking account it’s gonna take you over 1,400 years for that to grow into $20,000 so that is a very lousy investment option moving on how about a
Money market a money market has a slightly higher interest rate and the average is around a 0.1% well not a 0.1 percent it’s going to take you seven hundred twenty years to double your money so that is still a very lousy investment option and that’s not an interest rate that most people would be happy with so moving on then how about a cd a certificate of deposit
A short-term cd might yield about a 1% interest rate and that means that you will double your money in 72 years so if you invested $10,000 as a 20 year old and interest rates did not change by the time you are 92 years old you would have $20,000 now yes you could have a long-term cd at that point so that’s not really a fair analysis but all i’m getting at is that
The bank is not the best place to earn compound interest you can earn compound interest through a bank account or through investments from your bank but this is not the way that most people are doing it now the second way you can earn compound interest is through the stock market and this is the best way to earn compound interest and that is because the stock
Market on average pays about 8 to 10 percent per year and that is a compounded return so following the rule of 72 here if you take 72 divided by your 8% return that means that you can double your money with the stock market about every 9 years and as a young person you will be able to experience more doubling cycles of your money than somebody who is much older
So a 20 year old who starts investing their money is going to experience more doubling cycles than a 50 year old who begins investing their money and that right there is that time value of compound interest we were talking about the more time you allow your money to grow the more doubling cycles you’ll experience and the more your money is going to grow over time
And then another way that you can earn compound interest through the stock market is through dividend payments by reinvesting those dividends when you’re paid dividends from a stock you can either take that dividend in cash or you can reinvest that dividend back into the issuing stock and if you reinvest those dividends back into the issuing stock you’re earning
Dividends on dividends also known as compound interest so that is another way that you can earn compound interest for the stock market is through those dividend payments so on average a dividend stock will pay around a 3% dividend and just with that dividend alone you’ll double your money every 24 years by investing those dividends and the great part of this is
You can earn compound interest through asset appreciation as well as dividend reinvestment so when you invest in a stock that pays dividends but also has growth potential you can earn compound interest in two different ways but the most important thing you have to remember here is that in order to take advantage of compound interest through dividends you have to
Be reinvesting those dividends and then the third and final way a lot of people earn compound interest is through real estate by investing in real estate so let’s take a flipper for example somebody who buys a house fixes it up and then sells that house down the road let’s say somebody is able to earn a fifteen percent return on their money per year by flipping
Real estate while following that rule of 72 they would be able to double their money every 4.8 years this is how people generate a serious amount of wealth is by understanding the power of compound interest and understanding how to earn compound interest you can earn it through your business you can earn it through real estate you can earn through the stock market
Through dividends or you could earn it through your bank account the worst way to earn it but there are many different ways out there that you can earn compound interest the main thing you have to understand is that you should be doing it but anyways guys that’s gonna wrap up this video drop me a comment down below and let me know what your favorite method is of
Earning compound interest and if you guys have the time make sure you jump out and check out the investing simple blog where we have a whole article about compound interest and we’re also going to be talking about earning compound interest through dividends and my favorite investing platform for dividend investors so make sure you guys jump over and check that
Out the link is down in the description below but thank you guys so much for watching this video i hope you enjoyed it and i will see you in the next one if you are interested in learning more about investing in the stock market i’ve created a free course just for you the link is in the description below here are a few other videos you might enjoy as well you
Transcribed from video
How To Earn Compound Interest 📈 3 DIFFERENT WAYS! By Ryan Scribner
