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A deep dive into how time and interest rates work together to grow wealth exponentially.
If you had to choose between receiving 5 million by day 30!
Let's compare $100 invested at a 10% interest rate for 3 years.
1. Simple Interest: Each year you earn 10% of 10). After 3 years: 130. 2. Compound Interest: - Year 1: 110 - Year 2: 121 - Year 3: 133.10 3. The difference is small now, but over 30 years, the compound account would have 400!
Quick Check
What is the primary difference between simple and compound interest?
Answer
Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus any interest already earned.
Imagine you have $5,000 to invest. You are looking at two different accounts:
1. Account A offers a 4% interest rate. Using the Rule of 72: years to double. 2. Account B offers a 9% interest rate. Using the Rule of 72: years to double. 3. By choosing Account B, your money doubles more than twice as fast as Account A!
Quick Check
If an investment offers a 12% annual return, approximately how many years will it take for your money to double?
Answer
6 years (72 / 12 = 6).
The most important variable in the compound interest formula isn't the interest rate or the principal—it's Time (). Because compound interest is exponential, the 'curve' starts flat and then shoots upward. This is why financial experts urge teenagers to start saving immediately. If you start at age 15, every dollar you save has 50 years to compound before you retire. If you wait until age 35, you've lost 20 of the most powerful years of growth. This concept is often called the Time Value of Money: a dollar today is worth more than a dollar tomorrow because of its potential earning capacity.
Consider two friends, Alex and Sam, both earning 7% interest:
1. Alex (The Early Bird): Invests 20,000. 2. Sam (The Late Bloomer): Waits until age 30 to start. He invests 70,000. 3. The Result: At age 65, Alex (who invested less but started earlier) will have roughly 300,000. Alex wins by $150,000 just by starting 10 years sooner!
If you invest $1,000 at a 5% annual compound interest rate, what is the formula to find the amount after 10 years?
Using the Rule of 72, how long does it take to double your money at a 6% interest rate?
In the 'Early Bird vs. Late Bloomer' scenario, the person who starts earlier usually ends up with more money even if they stop saving sooner.
Review Tomorrow
Tomorrow morning, try to write down the Rule of 72 and explain to a friend why a 20-year-old who saves for 10 years might beat a 30-year-old who saves for 30 years.
Practice Activity
Find a 'Compound Interest Calculator' online. Plug in $100 a month starting at your current age versus starting at age 30. Look at the difference in the final totals at age 65.