You might envision a scenario in which you receive payment for merely ignoring your wealth (e.g., Your money is no longer accessible to you). You won’t need to read countless e-mails, have unnecessary meetings, or feel the need to burn yourself out doing side hustles; simply put; this is an example of compound interest at work, i.e., the longer you allow your cash to sit idle, the more productive it becomes. Think of it as a form of Lazy Genius Energy.
For many, this seems mundane and unexciting; however, this is one reason why many people neglect the potential.
For instance, let’s say you save $1,000 (fairly generic). Now this $1,000 will earn interest, and the interest earned will also earn interest. What I consider the second tier of earnings.
As you may be able to see, it takes several years before the effects of compound interest become apparent: Year 1? Nonsense. Year 5? Nonsense. Year 30? Hello, what happened here? (See What Date Indicator in Fire and Compound Interest).
It takes a while for the full effects of compound interest to manifest, as the process occurs in a cascading manner; therefore, because the initial impact is such a slow and steady pattern, it allows individuals to believe that there is much less impact than there is for years until one day, BOOM — the reality of compound interest comes to light in the form of numbers that don’t add up.
Individuals who start investing at an early age tend to have the appearance of good fortune when they reach retirement age, but are not “lucky” at all; they simply provided themselves the opportunity to let time take its course.
Frequency Is More Important Than You Thought
Interest can accrue yearly, monthly, or even every day, and the more frequently the interest is added to the principal amount, the more absurd the final balance becomes.
At first, monthly compounding seems insignificant. You’re talking about very small increases – pennies. Change that gets stuck underneath the couch cushions. However, once you extend this period to decades, your pennies become real money.
“The ‘This Is Getting Crazy’ Phase”
If you simply leave a small amount of money invested for long enough, the rate of growth starts to bend upward as if it’s disregarding the laws of mathematics. After thirty years, you will have converted your pocket change into something of value, after forty years that value will be impressive. After fifty years, individuals will assume that you did something remarkable.
It does not generate traffic on social media and does not go “viral” because it lacks the glamour that seems to be the way to go. Compound interest requires discipline to take advantage of rather than drama, and that is how it functions.
Whereas others chase after the next big “thing”, Compound Interest continues to earn big prizes behind the scenes.
While there is a formula available, it is unnecessary to memorize this formula in order to profit from it.
Focusing on the concept is far more important than understanding the calculations. The main idea is to begin investing as early as possible and to consistently invest without skipping any periods.
Every other company that markets compound interest does not sell its true value; rather they sell the perception that this activity has value based on the numbers associated with it; however, its strength lies in how to forget about how much money you could be making through compounding and how to allow the effects of time to compound productively.
The majority of people who end up in financial difficulty typically do not end up there due to poor investment choices, rather they end up there because they failed to provide enough time for their good investments to grow.
Compound interest grows whether you want it to or not, whether you are happy, sad, bored, or busy. Compound interest will continue to grow steadily if you simply allow it to do so.
