Albert Einstein once said, "There is no force in the universe more powerful than compound interest."
I was 2 years out of college when a friend of mine, Satomi, asked me to attend a financial seminar.
I was hesitant at first. Then she asked me, "Charles, did you ever learn how to manage your money?"
It was a simple question, but I realized that I really had no clue.
I took some courses in economics and advanced engineering calculus.
In my engineering econ class, learned stuff like: if you bought a machine for your business at X value would be the value in Y years if it depreciated at Z rate?
Well, even after completing an engineering degree, I started to realize that our school systems here in the US aren't really geared to teach us how to manage our lives and our finances...but they can help us make business owners wealthy.
Out of curiosity, I attended the financial seminar.
After 2 hours, the idea that stayed in my brain for weeks was the power of compound interest.
It was the "Rule of 72."
Using the Rule of 72 to Grow $20k to $1.2 Million!
So just to give you an example:
Let's say you had 20,000 saved up in a bank account that grew at 1% a year.
If you were to divide 72 by that 1 percent, it would be 72. So your money would double every 72 years!
So let's say that you want to save for the long-term and your account grows aggressively at 15%.
72 divided by 15 is equal to: 4.8. So every 4.8 years, your money would double.
So for the sake of simplicity in this educational example, let's round it up and say that your money doubled every 5 years.
- Year 0: $20,000
- Year 5: $40,000
- Year 10: $80,000
- Year 15: $160,000
- Year 20: $320,000
- Year 25: $640,000
- Year 30: $1,280,000
While 30 years is a long time to wait, it's the idea of making over $1.2 million from a fraction of the cost of a car.
That's why it's so important to leverage time and compound interest, no matter how old you are.
How Can I Use Compound Interest to Create Wealth?
Most people know that they could go to the bank and grow their money there.
However, you have to figure out what is the easiest way for you to grow and manage your money.
If your bank is only offering just 1-4%, you're still losing money because inflation will outpace the growth.
Here's a pic that shows an inflation graph from 2008-2018. You'll see that inflation was getting close to 6% in early 2008.
So you'll have to keep the rate of inflation in mind. If inflation was 6% in 2008 and your funds at the time were grown at a rate of 1%, that means that you were losing at a rate of 5% (6-1).
How Can I Start Investing?
Acorn has an interesting model where it will invest the difference between the rounded up number and what you spent on a credit card. That's a small amount, but it's a great way for young adults to see how money grows.
So what should I invest in?
I'm not going to give you financial advice in this blog post, but I would recommend to brainstorm and think about solid "Blue-Chip" companies that have been growing for decades.
In the US, we have:
- Home Depot
At the time of writing this article, I can't imagine these companies going away anytime soon.
If I would have put my money in these stocks when I started investing, I would have been better off compared to the money I put into aggressive technology stocks.
If you'd like to learn more about earning more and creating long-term, sustainable wealth, get access to my top wealth strategies.