Discover the power behind compound interest!
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Podcast Title: The Power of Compound Interest Explained
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here
Today we’ll discuss a topic that almost all of us have heard of “Compound Interest“. Over the past couple of weeks, I’ve had conversations with prospective clients and they mentioned finding a way to let “their money work for them”. I realized they meant “compound interest”. So today we’ll answer the questions of:
- How does it work? (4:30)
- Why is it so powerful? (8:50)
- How do I take advantage of it? (14:10)
Questions/Issues We’ll Address on this Episode:
How does it work?
The concept where every dollar of earnings becomes a candidate for earning interest [after the original investment] now, allowing you to earn “interest on your interest”.
Why is it so powerful?
So I’ll walk you through the math of a simple example. And you will quickly begin to see why there is such a “power” in this concept and that the most powerful component (“arguably”) is time and not really the interest rate you earn. This is corroborated by one of the most successful investors of all time: Sir John Templeton who said
“The best time to invest is when you have money. This is because history suggests it is not timing which matters, but time”. Sir John Templeton
Before we go to Excel let’s look at the actual mathematical formula and then I’ll show you on a financial calculator since financial advisors use this all time.
How do I take advantage of it?
Ironically enough, look at your credit card statement and you will not that daily compounding is used to calculate the interest you will be charged by the credit card companies. People wonder when they pay the minimums on their credit cards, why they will never get ahead. Well, it is because your minimum payment does not cover all the interest that has accumulated (or compounded) since your last purchase. And if you pay later in the month utilizing the grace period, the compounding just continues.
#taxsavings #retirementplanning #finlit #finance #financialadvisor #money #financialtips #financialadvice
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Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.
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