Yesterday I promised to tell you all about the magic of compound interest and why I LOVE it so much when it comes to money. Since I’m a woman who always keeps her promises here we go.
You may remember that I told you I save 25% of my income and I encourage every woman to save at least 10% of her own income for a rainy day, an emergency savings fund or long term savings/ retirement. Finding room in your budget to put money aside is the first step towards building your net worth. A net worth, doesn’t that sound nice?
The second step is to start investing those savings. Why? Because…as a wise woman (me) once said (yesterday):
So how does that work, exactly?
It’s the beauty of compound interest. In simple terms, compound interest is interest paid on interest you’ve already earned over time. It’s basically free money when you let your interest reinvest on top of your initial investment. You start earning profit on top of your investment plus all past profits too.
That should make you want to start investing right now..
Sound too complicated? It’s actually very simple. Have a look:
$1,000 – your initial investment
$50 – interest you earn on the initial investment after one month because you have a 5% rate of return
$1,050 – your new total investment which is the initial investment plus your first month of interest
$52.50 – interest you’ll earn the second month on the new investment amount, still assuming a 5% rate of return
$1,102.50 – your new investment amount and you only actually invested $1000 out of pocket
Excited yet? Isn’t that great?!
Now that’s an example of an account where the interest compounds monthly, there are also accounts where the interest only compounds once a year (Annually) others compound every single day, so make sure you read the fine print to find out what kind of compounding your investments will receive.
Come back next week where I’ll be sharing how I personally grew my investment portfolio to over $90,000 in a little over 3 years so I could quit my day job.
If you’re ready to start investing and enjoying the rewards of compound interest download our one sheet which includes the additional 9 steps you will need to get started in the stock market.
*Disclaimer: and yes I promise you this is English even though it may sound like french to you*
Please keep in mind that the initial investment amount can fluctuate with market movements depending on the level of risk associated with the type of investment you buy. Income investments such as bond mutual funds are lower risk than equities (individual stocks). Always talk to a professional before making any investment decisions to ensure you’re putting your money in the right place for your goals. (that way you can’t say but Carrie said)
Distributions on investments are paid out in one of three types of income: interest, dividends or capital gains. As long as you allow those distributions to reinvest you will always take advantage of compound interest (even though the other two have different names).