This Is The Power Of Compound Interest (And How It Works)

Summary

This 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.