Compound interest, you the real MVP. Click To Tweet
I am constantly sounding the alarm, telling people that the best time to invest is today. As we all know, just telling someone to do something won’t get the job done. So I am going to put my words where my mouth is and show you the magical powers of compound interest.
I want to start our compound interest journey with a story:
In 2015, there was a man who bought a penny that was minted in 1792 for $2.5 million.
Yes, you read that correctly. A PENNY.
I remember reading this story and being amazed that something worth so little, could be worth so much hundreds of years later. 225 years to be exact.
Then my mind started running. What if someone had invested that penny at an 8% interest rate in 1792? What would the penny be worth?
The results were astounding. A single penny would compound to $33 million dollars.
Again, A PENNY.
There’s a deep lesson that we all need to learn here. Compound interest is one powerful son of a biscuit. Ignoring its ability to create wealth, can only hurt you.
There’s a large amount of research coming out that says millennials are not investing. They blame everything from student loans, increased rent, or low salaries. All those things can definitely be a factor in how much you save, but to use them as a crippling crutch is not acceptable. We are crying wolf.
Shouldn’t I pay down my debt first? I have a ton of student loan debt and I got a little too spendy on my credit cards.
While that logic is sound, it’s robbing you of a tremendous wealth opportunity. An opportunity that you can’t get back no matter what you do. Here’s why you need to at least start investing something today.
Let’s play my favorite game of would you rather:
Let’s say you have a job you love and you plan to retire at age 65.
Would you rather:
A.) Invest $1,000 per month from age 25-35 (10 years) and never put another dime into your retirement. Your total amount invested would be $120,000.
B.) Invest $1,000 per month from age 35-65 (30 years). Your total amount invested would be $365,000.
The smartest choice would have to be B right? You are investing 1,000 a month for 30 years longer in life. There’s no way you would be better off by choosing A?
WRONG. (Cue game show buzzer)
Option A = $2,000,000 at age 65
Option B = $1,500,000 at age 65
If you choose option A, you would accumulate $500,000 more by the time you retired. HALF A MILLION DOLLARS MORE for 1/3 of the effort. The only difference is starting early.
That my friends is the power of compound interest at an early age. So, let’s slow clap together. Compound interest, you the real MVP. You’re the reason we can all become millionaires with just a little discipline.
This is why I cringe every time someone says, “I have so much time, I’ll worry about investing later.” If you are in your twenties, you are in your investing golden years. The time is now. Become radically ruthless about where you spend. Your priorities in your 20s are crucial, no matter how much time you may think you have.
If you are in your twenties, you are in your investing golden years. Click To Tweet
If you can save 50% of your income, then do it. This may sound like deprivation to some. As Jim Collins puts it: “I think of this as spending in a different way. Instead of buying a bigger house, fancy car, or new wardrobe, you are spending money on your freedom.
Okay, you’ve convinced me. Where do I put this money?
All the numbers I just showed you were at an 8% interest rate. Where can you get an 8% interest rate?
The Vanguard Total Stock Market Index Fund.
You don’t need fancy actively managed funds (a.k.a. mutual funds), they will cost you way too much in fees. You don’t need individual stocks unless you plan on spending a large amount of time every week researching and following up.
Compound interest will either work for you or against you. It’s the responsibility of every single one of us to make sure we are on the winning side. Not only do you need to choose the winning side, but you need to choose early. Wealth building is simple. Spend less than you make, invest the rest and avoid debt. If you do those three things, compound interest will be your greatest ally.
Like what you’re reading? Click here and get some of this sweet action to your inbox!