In this article, am going to be talking about compound interest and how you can actually use compound interest to turn $1,000 into $10,000. I know that sounds a little bit like a clickbait title but it’s not, this entire strategy takes a lot of time so the younger that you start, the better. You’ll understand when I go into it a little bit more in-depth, but basically, this is just math, like it works, you just have to trust in it, and believe in it as long as you have the patience and the discipline to stick to it. With that said, let’s talk about compound interest, and let’s get right into it.
I want to reiterate that this is not a get-rich-quick scheme, there are a lot of people on the Internet these days trying to get younger people to start day trading, playing options, or sharing information about a certain stock picK that they really believe in. A lot of young people are flocking to it and you can kind of see that just in how the market is been super swingy lately.
A lot of people see an opportunity to get into the market, but really they don’t really know what they’re doing. There are a lot of people that want to sell you a course or sell you information about how you can get rich quicker, but honestly, those strategies are always going to come with a ton of risk. While one out of a thousand people might turn a thousand dollars into ten thousand dollars overnight, the nine hundred-nine-nine of them probably have lost all their money.
If you really want to turn $1,000 into $10,000 without absolutely doing anything, you can use something called compound interest. With compound interest, you’re making an initial investment let’s call it a$1,000 in this case since that’s the example that we’re using, but you’re using $1,000 as your principal which is your starting balance, and as long as you’re getting a rate of return such as 8% which is your interest. And by the way, the average annual return of the S&P 500 for the past 50 years has been 8%.
How to Turn $1,000 to $10,000
So, how do you actually get 8%? Well, what you can do is actually buy something called an index fund that tracks the market. An S&P 500 index fund is just a collection of all the S&P 500 stocks in one investment vehicle. Anyway, it’s been returning about 8% for the past 50 years, if you had your principal balance of $1,000 and you were getting 8% a year, you’d get a certain thing called interest which is $80 in this case. 8% times a $1,000 is $80 a year.
If you were to invest your $1,000 and then S&P 500 index fund or any type of investment that returns an 8% return, and you kept all of your interest earnings in that same account, you never took out any money but you just kept earning 8% year over year over year over a year, that’s called making money on your money or interest on your interest and that’s the beauty of compound interest.
I want to show you guys what the time value of money is, and how that compound interest is going to compound over the period of 30 years where you literally have to do nothing, and you can get from a thousand dollar balance to ten thousand dollar balance. Basically, you 10x your money in thirty years but the whole point of this strategy is that you need to allow time to work its magic on your balance.
Compound Interest Table
|Year||Principal||Interest Rate||Interest Earned||Total Earned|
Looking at the table above, in year one you can see that you have a $1,000 initial investment and an 8% interest rate, you’re gonna earn $80 on your interest. At the end of the year, you’re going to have $1,080. In the next year, year two, the same thing is going to happen, but this time 8% of your initial investment now is 8% of $1,080 instead of 8% of $1,000.
All of a sudden, your interest earned for year two is $86 and then your total earned after year two is $1,166. I said that’s kind of weird, but a $1,166 is now your balance at the end of year two, and you can see where I’m going with this. Every single year that you do this, your balance at the end of the year is bigger, and then that 8% times that balance that you have at the beginning of the year is gonna be even more interest and it’s just gonna keep compounding and compounding like a really big snowball.
Just like a snowball, it’s going to start off basically like a snowflake, and as you go down the hill it’s gonna get bigger and bigger and bigger until it has so much momentum that the growth is gonna be exponential. Let me show you what that exponential growth looks like with the chart below.
|Year||Principal||Interest Rate||Interest Earned||Total Earned|
Going all the way down, if you just look at year 29, our beginning balance in year 29 is $8,627, 8% on that eighty-six twenty-seven is now $690 interest earned in year 29. If you think about it, in year one, we were earning $80 of interest for that amount of time in your twenty-nine we’re earning six hundred ninety dollars for that same amount of time. In year 29 we’re earning $690 for that same amount of time.
8x and 9x
Literally the same time frame, we almost earned 8x to 9x what we were earning in year one. However, you have to understand that this took us twenty-nine years to get to, but as you can see when you hit your thirty, your ending balance is actually going to be over ten thousand dollars.
This is pretty cool, it’s $1,000 invested at something at eight percent and all you did was just sit around on your hands, you didn’t do anything, and all of a sudden you made nine thousand extra dollars, and now you have a total balance of ten thousand. So when I say you can turn $1,000 into $10,000 this is exactly how you would do it.
$10,000 Even Faster
The other thing that you can do is continue to additionally fund your balance side. What a lot of people do with their investment strategy is they’ll take $1,000, and put it in an investment account. After they have that $1,000 in that investment account, they’re going to continually add additional funds and deposits to that investment account to continue to grow their money. Instead of taking 30 years to build up to $10,000 you can really take a thousand dollars and grow it even faster if you continually add to that initial balance side.
A Quick Scenario
Real quick let’s look at this scenario that’ll show the real power of compounding. In this scenario, investor A starts saving at the age of twenty-five, saves $2,000 a year, and assumes an 8% interest rate. Investor B enjoys his or her life until the age of thirty-five and then starts to save that same amount and then invests at that same interest rate. The results will be, investor A starts off at the age of twenty-five, but by the time they’re sixty-five, their actual account balance is going to be $603,012 because they started ten years earlier.
Investor B on the other hand, because they started at age thirty-five, they lost out in ten years of time. Time is the most important part of a compound interest calculation. So, because they missed 10 years in the beginning, investor B now only has $264,818 at the end of thirty years of investing. At age 65 investor A actually made $338,000 more than an investor B just by starting ten years earlier.
I just want to point out that in this scenario, both investors are adding two thousand dollars a year to their portfolios. If you’re twenty years old and you’re looking at this, now is the right time to start investing for the long term and to stay disciplined, because, by the time you’re sixty-five, you’ll be probably a millionaire if not many times over.
Never Too Late
If you’re 35, 40, 45, or even older, it’s never too late to start saving and investing for the future. you might just have to up your contributions if you can with hopefully increased income, but it’s never too late. As you can see, even if you are investor B, you’re still making a decent amount of money by the time you’re 65, 70, or 75, or whatever time you are earning your compound interest strategy in.
If you ever want to figure out how long it’ll take for your money to double, there’s something called the rule of 72, I think it was coined by Albert Einstein that’s what a lot of articles are saying online but nobody really knows for sure. Rule of 72 says this, if you take the number 72 and you divide the interest rate that you’re targeting, that’ll tell you the number of years your investment will take to double.
Rule of 72
|Interest Rate||Years to Double|
Basically, if your interest rate was 6% you can see that it would take your investment 12 years to double, and if you’re getting a 20% interest rate, it’ll just going to be super-fast. But again, the main thing here is that you’re consistent, you’re disciplined, and you’re sticking with this strategy for the long term.
One quick note about saying disciplined is, time in the market beats timing the market. Right now the market is swinging like crazy as I said earlier, a lot of people are going to feel pressured to take out their money or take out their investments from their investment account, or maybe they see a dip they want to buy a bunch of investment. In any case, time in the market is going to beat timing the market.
If you’re a beginner investor just remember that as long as you’re in the market, you’re doing something right, as long as your time horizon is long enough to justify being in the market. The more time you give your investments, the more you’re able to accelerate the income potential of that initial investment which takes a bunch of pressure off of you.
Personally, I have succumbed to peer pressure before of people saying that I should take my money out when things weren’t going so well. I was persuaded to take some money out of the market just because I thought that the market was going to crash, and that ended up being a huge mistake. I lost out in two years of returns because I just kind of sat around in cash waiting for a while, but as you may know, we had a bull run for quite a long time for the periods of 2010 to 2020, ever since that I’ve been trying to just stick to my own investment strategy and not try to let other people tell me what to do.
Since I’m investing for the long term, I really want to just take advantage of the compound interest strategy I’m laying it here.
How Compound Interest Affects My Spendings
Let me tell you about how compound interest affects my spending, and how I think about spending money. If I don’t really need something, I’m not gonna buy it. I’ve thought about this for a really long time before like there are things that I really want, but sometimes I just don’t need them. If you really really need something, there’s no problem with buying something, like if you need a new chair, go buy a new chair especially if it’s ergonomic.
But if you want something, let’s say you want a new gaming PC, but you don’t need a new gaming PC since you have an old one that runs perfectly fine and plays all the games you wanted to play and more, and there’s nothing wrong with it, you don’t need a new gaming PC.
Let’s say instead of spending $1,250 on a new gaming PC, you put it in the market, and you’re just letting it just sit there. In 30 years, based on what I’ve showed you here, that’s going to be worth like $12,500.
I hope that you enjoyed this articles, and that you learned how to use compound interest in your own investment portfolio. Peace and Happy Hustling!