Compounding Interest

Albert Einstein referred to compounding interest as the eighth wonder of the world, and as usual, he?s right. It?s an amazing thing when it is working for you, and it is terrifying when it is working against you. 

What is compounding interest you ask? It is when the unpaid interest or financial gains from an investment are rolled back into the principal. 

So let?s say you can?t make your credit card payment this month, this month?s interest is added to your balance and the next month you?ll be paying interest on the interest. You?ll keep paying interest on it until you?ve paid off that part of the balance. Miss two months? Yeah that?s when things start getting really nasty. It sucks when it is against you! 

On the other hand, it?s awesome when you use compounding in your investments. One of the things I enjoy doing is trading crypto. I sat out for 90 days trying to earn 1% a day. Just one. In terms of BTC that means a 310 point swing, ETH is 19 points, and others are far less. You also have to factor in your fee %, but I traded enough that my fees were negligible on any one trade. Crypto is by nature highly volatile so these swings were pretty easy to come by most days. 

It took less than 70 days for me to double my money. I only traded with money I could lose, and in projects that were relatively safe when compared to the rest of the crypto space. Even so, it wasn?t without risk, and you should always research anything you invest in. Whether it is stocks, bonds, crypto, or something else (like we invested in a TV series) you need to do your homework and only invest what you can afford to lose. 

Other places where compounding interest works for me is with dividend stocks. My wife?s investment strategy is different from mine, and I consider that a good thing. It includes around 60% dividend stocks and the result has been a steady 1-1.2% monthly gains. That might not sound like much, but a 12-14.4% gain for a year is pretty solid considering most calculations use the 7% average. 

The sooner you start putting your money to work for you, the better. Want to turn 1000 in 21,000? Compound it for 45 years at 7%. If you only compound it for 35 that same result is 10,600. 25 years? 5,400. So as you can see the sooner you start and the longer you allow it to accumulate the better your long term returns will be. Want to make a million dollars?

1000 [initial] + 500/mo @ 7% interest for 38 years will yield approximately 1,050,000.

10000[initial] + 1000/mo @ 7% interest for 28 years will yield approximately 1,030,000.

10000[initial] + 2000/mo @ 7% interest for 20 years will yield approximately 1,020,000.

So as you can see, the sooner you start, the less you have to contribute to reach your goal. The longer you wait, the more money it is going to take from your budget. Even if you start with just 100/mo and let it grow as you grow in your career, you'll be happy you did later. I also recommend that you always put in enough to get your employer match. That's an immediate 50-100% return on your investment and it will start compounding too.