The Power of Compound Interest: Why You Want to Invest

March 21, 2017

It’s never too early to start thinking about your long-term investment goals. Whether you’re looking to set yourself up for retirement or save up college tuition for your children, building an investment portfolio can help you get there. Many of us, especially as young adults, tend to wait until the future—when we’re “more financially stable”—before investing. However, when it comes to long-term investments, the younger you are, the better, especially when it comes to getting the most from compound interest. But what exactly is compound interest and why do you need to know about it?

Compound Interest: The Basics

Think of it as earning interest on interest. Basically, compound interest is calculated on the initial investment that you made, as well as on the accumulated interest. This means that the amount invested will grow at a faster rate than simple interest, a number which is calculated based only on the original investment amount. Compound interest can be either annual or continuous (daily, weekly, monthly). Basically, the more compound periods you have, the greater the amount of compound interest.

Sounds pretty lucrative, doesn’t it? Well, it is! Here are three reasons why you should invest long term to really benefit from this option.

1. When You Start Means More than How Much You Invest

For most of us, when we’re younger, money is tight. But thanks to compound interest, that doesn’t matter. By the time you’re 65 years old, a single investment of $8,000 made at the age of 25 would have increased to over $56,000 (based on a 5% annual compound interest rate). However, if you had made the same investment at age 35, you would only yield $34,000 by age 65. Basically, with compound interest, the longer you leave your money to grow, the more it yields.

So there’s no need to wait until you have six figures before you start investing—a little can go a long way over time!

2. Excellent for a Business’s Long-Term Cash Management Plan

In order for your business to succeed in the long run, it’s important that you invest money back into the business. Paying money into a compound interest account is one way to help ensure that your business stays afloat over time.

For example, with proper forecasting, a manufacturing business can determine when money will be needed to replace large, expensive machinery. If you know you’ll require $10,000 in ten years to replace your machinery, compound interest accounts can get you there with an initial investment that is much lower than having to fork over the cash upon demand.

While a simple savings account can do the same, it will take significantly more time or a much larger initial investment – which isn’t ideal, and is likely not as feasible given the average business’s fluctuating cash flow.

3. Becoming a Millionaire is a Very Realistic Option

Winning the lotto is another (far less likely!) option—but until that happens, compound interest is a long-term way of getting you there. But it definitely can get you there!

In fact, you can calculate how much you need to be saving each month in order to make a million dollars by retirement using your current age and a specific percentage return rate. This helps put that goal into perspective, which in turn will give you the information you need to reach it. Use these calculations by Business Insider to figure out how much you need to get there by the time you retire.

The Power of Compound Interest: Start Early

If you’re looking to get rich quick, compound interest is not the way. But it is a way to get rich over time and secure your long-term future. The sooner you start, the less you’ll need to invest and the more you’ll reap years from now. Compared to your usual snail-like savings account or low-risk retirement fund, compound interest can really set you up well and put control of your personal finances back in your hands.

The easiest way to start taking advantage of compound interest is by enrolling in a 401(k) or IRA—both of which offer tax-deferred savings that are compounded over time. Once you find out how to make compound interest work in your favor, it really can be your best friend when it comes to financial freedom.

Looking to increase your income to start benefitting from compound interest investments? Our business experts will teach you how to build a lucrative business to achieve the long-term lifestyle you’ve been dreaming of. Contact us at (858) 837-1505 or for more information about joining the Six Figure Profession team.

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