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Compound Interest: It Could Make You A Millionaire

Compound-interest2

Explaining Compound Interest and How It Helps You or Destroys You

For interest we are talking about the right to have a share in something from an asset class like a stock or a bond to having an interest in a piece of real estate property.  You can earn simple interest which is paid on your original investment for example, like a capital gain from your stock or you can earn compound interest which will be paid on your original investment plus your earnings.  Your money starts essentially earning money for you which is pretty cool.

Read about how compound interest can make you a millionaire.

Consider an average worker. If you’re 25 and you set aside $450 a month (compounded quarterly) for the next 40 years (to retire at 65), you will have a nest egg of $1,181,409.83. If you start at age 35 and want to retire in 30 years, at age 65, that $450 a month is only going to amount to $550,955.76, assuming a 7% annualized rate. With compound interest, a 10-year difference can mean retiring as a millionaire (or not).

If you have a brokerage account and employ a buy and hold strategy you can easily set up your brokerage to reinvest your dividends for you.  When managing your investments/debt it’s best to consider what has the highest interest rate and pay that off first if it’s debt or invest at a higher rate if you can get a bigger return.  For me, my student loans have an interest rate at less than 1% a year so it doesn’t make sense for me to pay them off right away when I could invest the money I earn in a safe corporate bond that earns 3% a year.  It’s usually always wise to pay off those high APR credit cards first.

Learn more about how compound interest could help you or destroy you.

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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.

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