Today I want to talk about something a little different. When I started this blog, it wasn’t about compound interest, it was all about the spending plan and creating a plan to spend your money. I believe that using a spending plan may be the most important thing you can do to manage your money better. However, another important but not fully understood concept in money management is building wealth with compound interest.
What is Compound Interest?
Compound interest is the interest calculated based on both the initial principal and the accumulated interest from previous periods on a loan or deposit. According to Investopedia, it goes back to 17th-century Italy. To understand better, think of it as interest on interest. And it grows faster than simple interest, which is interest on just the principle.
What’s the Big Deal
Compound interest is what gives the average person like you and I a fighting chance to build wealth. Someone once said that those who understand interest earn it, and those who do not understand interest pay it. There are two caveats however:
• It takes time to realize the gain. There’s no magical investment that’s guaranteed to double your money. One or two years is too short a timeframe to experience its extreme power. Therefore, you need to be patient, but the results are worth the time.
• You need to continue to invest, even when everyone else thinks it crazy to do so because it’s the way to get Compound interest working for you.
And even with those limitations, it’s still the most powerful weapon to build wealth.
Get Compound Interest Working for You
It will either work for you or against you. To make it work for you, grow the difference between your income and expenses as much as you can and then invest. This will allow you to realize more because you will have more to invest. Making your money work for you is all about having compound interest on your side.
2022 will be a year of work, rebuilding, and hope. And I will continue to bring financial literacy information like the Build Wealth with Compound Interest article above to you. In my last blog post for 2021, let me wish loyal readers and everyone a happy, joyous, and prosperous new year.