Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” He also said that the math behind it is difficult and not very intuitive.
It’s understandable that many people don’t quite understand the concept of compound interest fully. More importantly, do you understand how compound interest can benefit you and help you retire comfortably?
Here’s an example. At a 6% interest rate your money is doubling once about every 12 years. Let’s say that you’re investing for the next 30 years. In that period of time you would double your money once in the first 12 years, then again in the second 12 years, and then half of a double for 6 years.
If you start with $10,000 at 6%, in 30 years you would have the $10,000 turn into $20,000 after 12 years. After 24 years $20,000 would turn into $40,000, and then you get half of that again, another $20,000 after the last 6 years. Over a 30-year period of time at 6% return, you end up with about $60,000. Which is pretty good over 30 years when you think about it.
But, what if you got a 15% return? How much more money will you make? What if you’re paying for this interest with credit cards? Learn all about what compound interest means for you in the video below.
Having a good understanding of compound interest and how to make it work for us, rather than against us, is the key to a great retirement. To see an example of how interest rates compounding over time will affect you, download my free retirement calculator. It’s awesome and you can crank it out and see what it’ll do. This is especially useful if you are planning to retire early. Just click the button below to get it.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.