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.

Outlines

00:00

💹 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.

Keywords

💡Invest

Investing refers to the act of allocating resources, such as money, with the expectation of generating an income or profit. In the video, investing is discussed as a means to grow wealth over time, particularly through the stock market, with the example of the S&P 500 being used to illustrate historical returns.

💡Annual Return

Annual return is the profit or loss generated on an investment over one year. It is a key metric for evaluating investment performance. The script mentions a 10% annual return as a benchmark, which is achievable based on historical averages of the S&P 500.

💡Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. The video emphasizes the power of compound interest as a driver of wealth accumulation over the long term, particularly when starting early in life.

💡S&P 500

The S&P 500 is a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. It is often used as a benchmark for the overall U.S. stock market. The script uses the S&P 500 to provide context for what a typical annual return might look like.

💡Debt

Debt refers to an obligation to pay a sum of money that is borrowed. The video discusses the importance of being debt-free before starting to invest, as debt can hinder one's ability to save and invest due to the need to service the debt.

💡Emergency Fund

An emergency fund is a cash reserve designed to cover unexpected expenses without incurring debt. The script suggests that having a fully funded emergency fund is a prerequisite to starting to invest, as it provides financial security.

💡401k

A 401k is a retirement savings plan sponsored by an employer in the United States. It allows employees to save and invest a portion of their paycheck before taxes are taken out. The video mentions 401ks as a common vehicle for long-term investing.

💡Roth IRA

A Roth IRA is a type of individual retirement account in the United States that allows after-tax contributions to grow tax-free. The video includes Roth IRAs as part of a strategy for consistent investing over time.

💡Growth Stock

Growth stocks are shares in companies that are expected to grow at an above-average rate compared to the market. The script implies that investing in growth stocks can be part of a strategy for achieving higher returns over time.

💡Compound Growth

Compound growth is similar to compound interest but refers to the increase in the value of an investment over time, where earnings are reinvested to generate additional earnings. The video highlights the concept of compound growth as a powerful wealth-building tool.

💡Millionaire

In the context of the video, a millionaire is someone who has accumulated wealth through consistent investing and financial discipline. The video shares findings from a millionaire study, emphasizing that becoming a millionaire is achievable through a proven plan and consistent investing.

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