This Is The Power Of Compound Interest (And How It Works)
Summary
TLDRThis script emphasizes the power of compound interest and early investment. It illustrates how a $10,000 investment at 10% annual return can grow to $452,000 in 40 years. It contrasts Ben, who starts investing at 21 and stops at 30, with Joey, who invests from 30 to 67, showing Ben's earlier start results in $2.1 million versus Joey's $1.2 million. The message is clear: start investing as soon as possible, even if it's just after clearing consumer debt and funding an emergency fund.
Takeaways
- 💹 Investing $10,000 at a 10% annual return can grow to $452,000 in 40 years due to compound interest.
- 📈 Historically, the S&P 500 has averaged a 10-12% return, making a 10% annual return a reasonable expectation.
- 💼 Starting to invest early can lead to significant wealth accumulation, as illustrated by the example of Ben starting at 21 and stopping at 30.
- 🚫 It's never too late to start investing; even those in their 50s or 60s can benefit from compound growth over 20 years.
- 💰 The power of compounding means that Ben, who invested for only 9 years, ends up with more than Joey, who invested for 37 years, but started later.
- 🌳 The best time to start investing was 20 years ago; the next best time is today.
- 💳 Getting out of consumer debt and having a fully funded emergency fund is crucial before investing.
- 🏦 Most millionaires in the study became wealthy by consistently investing in 401k and Roth IRA plans, not by picking the best stocks.
- 📊 The average age of millionaires in the study was 49, showing that wealth building is achievable at a relatively young age.
- 💼 It's not necessary to be a genius investor to become a millionaire; consistency and long-term investing are key.
Q & A
What is the average annual return of the S&P 500 index?
-The average annual return of the S&P 500 index has been between 10 to 12 percent since its inception.
How much would a $10,000 investment grow to after 40 years with a 10% annual return?
-A $10,000 investment at a 10% annual return would grow to $452,000 after 40 years.
What is the significance of starting to invest early as illustrated by the example of Ben?
-Starting to invest early allows for the power of compound interest to work over a longer period, as shown by Ben who invested $2,400 a year from age 21 to 30 and had a total investment of $2.1 million by age 67.
How much did Joey contribute over his investing period, and how did his investment grow by age 67?
-Joey contributed $2,400 a year from age 30 to 67, totaling $88,800, and his investment grew to $1.2 million by age 67.
What is the difference in investment growth between Ben and Joey by age 67?
-By age 67, Ben's investment had grown to $2.1 million while Joey's had grown to $1.2 million, showing a difference of nearly $1 million.
Why is it not too late to start investing even if someone is in their 50s or 60s?
-It's not too late to start investing because even at an older age, one can still take advantage of compound growth over the remaining years.
What is the recommended first step before starting to invest according to the script?
-The recommended first step before starting to invest is to be out of consumer debt with a fully funded emergency fund.
Why might someone be advised to pause employer match contributions temporarily?
-Someone might be advised to pause employer match contributions temporarily to create more margin to pay off debt faster, then resume investing at 15% once the debt is paid off.
What was the average age of the millionaires in the study mentioned in the script?
-The average age of the millionaires in the study was 49.
What is the key principle for building wealth according to the script?
-The key principle for building wealth is to invest consistently over a long period of time, even if one is a mediocre investor.
Outlines
💹 The Power of Compound Interest
The paragraph discusses the concept of compound interest using an example of an investment of $10,000 at a 10% annual return. It compares this to the historical average returns of the S&P 500, which has been around 10-12% since its inception. The example illustrates how the initial investment grows over 40 years to $452,000, with the investor only contributing the initial $10,000. The paragraph emphasizes the importance of starting early, using the examples of individuals named Ben and Joey, who start investing at different ages and contribute different amounts, but due to the power of compound interest, the one who starts earlier ends up with significantly more money.
Mindmap
Keywords
💡Invest
💡Annual Return
💡Compound Interest
💡S&P 500
💡Debt
💡Emergency Fund
💡401k
💡Roth IRA
💡Growth Stock
💡Compound Growth
💡Millionaire
Highlights
Investing $10,000 at a 10% annual return can yield significant growth over 40 years.
The S&P 500 has averaged a 10-12% return since its inception, making a 10% return achievable.
After 40 years, a $10,000 investment at 10% annual return grows to $452,000.
Compound interest is the key to the impressive growth of the investment.
Starting early can lead to substantial wealth accumulation due to the power of compounding.
Ben, who starts investing at 21 and stops at 30, outperforms Joey who starts at 30 and invests until 67.
Ben's total contribution of $21,600 grows to $2.1 million by age 67.
Joey, despite contributing for a longer period, ends up with only $1.2 million.
The nine-year head start Ben had made a difference of nearly $1 million by age 67.
It's never too late to start investing; even starting at 30 can lead to significant growth.
The best time to start investing is after being debt-free and having an emergency fund.
Many people are hesitant to pause investing to pay off debt, but it can be a strategic move.
Investing 15% of your income consistently can lead to millionaire status.
Most millionaires in the study were mediocre investors but invested consistently over time.
The average age of millionaires in the study was 49, showing it's possible to build wealth at any age.
The study of over 10,000 individuals shows that following a proven plan can lead to wealth building.
You don't need to be a genius investor to become a millionaire; consistency is key.
Transcripts
foreign
here's a quick example if you invest ten
thousand dollars and you get a ten
percent annual return which by the way
people go what do you get a 10 return if
you look at the S P 500 which
essentially is The Benchmark index for
the stock market it's the top 500
companies uh if you look at that the
average return has been 10 to 12 percent
since its Inception
so this is not an outrageous claim that
you could get a 10 average annual return
not every year some years it may be down
22 percent some years it's up 20 who
knows uh but that ten ten thousand
dollars at a ten percent return and if
you just leave that ten thousand alone
for 40 years here's what happens at year
one you're at ten thousand year ten
you're almost at 26. by year 20 you're
at sixty seven thousand 30 years in
you're at 175 000 and then 40 years in
you're at 452 000 is that not amazing
that's fantastic and remember you only
put in 10.
and so the total growth on that was 442
000 of money that you didn't put in it
was just your interest earning interest
so how does that happen well let's talk
through an example of this and the power
of starting early because a lot of
people they they aren't maybe they're
not there yet Ken either they have debt
they don't have the emergency fund
they're in their 40s or 50s or 60s they
feel like it's too late they feel like
they don't have the knowledge let's take
someone my age George I'm 48. oh boy all
right I wasn't gonna go that old Ken I
was gonna go well the example here you
can see you can change the numbers on
the example but let's say this guy Ben
who starts at 21. right one kid he his
parents went through FPU he did this
stuff and he invests 2 400 bucks a year
you got that just 2400 2400 a year it's
not a lot that's 200 a month yeah and he
stops contributing at age 30. so from 21
to 30 2400 bucks a year the total amount
he contributed was 21 600 bucks now his
buddy Joey a little older he started
investing at age 30 and he invests 2 400
a year as well and he contributes until
he is 67. so instead of nine years he
contributes for 37 years and the total
amount he contributes 88 800.
now in your mind Ken without doing math
you're going well Joey's got to have
more Joey's ahead he invested for a lot
longer period of time you would be
what's known as wrong because at age 67
Ben's investment remember his 21 000 he
put in has grown to 2.1 million dollars
Joey's investment has grown to 1.2
million dollars so that nine-year
difference that nine-year Gap from when
Ben started to when Joey started was a
difference of close to 1 million dollars
is that not wild it's crazy now some
people hear that and they go well wait a
second is it too late for me no because
what about the guy who started at 30.
the best time to plant a tree was 20
years ago the next best time is today
and so regardless of where you're at you
got to start and if you're 50 well still
if you let's say it's 70 years old you
still have 20 years of compound growth
to take advantage of and if you're young
and you follow this plan you go hey what
if I could graduate debt free what if I
could get out of all my debt cut up the
cards have an emergency fund begin
investing 15 within normal income you're
going to be a multi-millionaire if you
just start when you're out of college
and so regardless of your age the key
here is to get started as soon as you
can and the right time to start
investing Ken is once you're out of
Consumer Debt with a fully funded
emergency fund now a lot of people get
mad at us for this because they go oh my
gosh you're going to make me throw away
the company match part of the reason you
don't have the margin to invest 15 is
because you're carrying all this debt
your broke living paycheck to paycheck
and you're trying to get this three
percent match what if for a season you
paused you went down to zero on the
match zero on your investing so that you
had more margins to throw at the debt
now we're added at faster and we're back
to 15 once we come back to investing so
it's a powerful powerful principle to
take advantage of compound interest
compound growth capital appreciation
whatever nerdy word you want to throw on
it and the key is you don't have to be a
genius investor I mean our millionaire
study found that most of them were
mediocre investors that just invested
consistently over a long period of time
in a 401k and a Roth IRA in growth stock
mutual funds and they didn't even pick
the best ones they just went all right
this is not a super volatile investment
it's not a single stock it's not crypto
I'm just going to invest in my
retirement plan and they became
millionaires by doing that and the
average age was 49. so you're right on
track Ken look at that we get started at
49 no they became millionaire average
age for the millionaires in our study of
over 10 000. I see so somewhere younger
some are older gotcha but it just goes
to show you if you just follow a proven
plan you don't have to make a bajillion
dollars to be a doctor or a lawyer you
can build wealth on your terms uh
without having to strike it rich or get
an inheritance or do all these crazy
things
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