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Investing Basics: Compound Interest [Get Started] | Phil Town

hi guys I'm Phil town from rule 1

investing and today I want to talk to

you about compound interest

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so if you guys heard about the magic of

compound interest because it's magic and

truth it's really just math but it feels

like magic when interest is compounded

rather than paid sort of in a straight

line linearly the overall size of the

investment grows exponentially faster in

other words if you were to look at the

growth of interest when you're being

paid interest on your interest it looks

a bit on a on a chart like a hockey

stick it just starts like this and then

the longer time goes along the steeper

the growth goes the effects are harder

to see in the early years but eventually

they become very pronounced so what is

compounding and how does it work to

compound interest is the effect of

reinvesting earnings from an original

investment over and over and over again

in other words if you don't spend the

earnings from the investment but you

allow them to add to the original

investment the size of the investment

will grow each time there's increased

interest so let's use an example imagine

if you invest $100 at ten percent per

year for 50 years but you don't reinvest

the earnings in that case what you're

going to do is you're going to earn five

hundred dollars more than your original

investment this is because 10% of $100

is ten dollars and ten dollars each year

multiplied by 50 is five hundred dollars

so your total investment after 50 years

will then be one hundred dollars you

invest initially plus five hundred

dollars in the earnings so you get a

total of six hundred bucks now that's

not a lot at ten percent interest

for 50 years so imagine that you

reinvest your earnings every single year

over that 50 year period so instead of

just taking the earnings and then they

sit there or you spend them or whatever

the first year you're going to make 10

percent or 10 bucks on your initial $100

but this time

you put that extra $10 into the $100

portfolio that means at the beginning of

year 2 you have 110 dollars that is now

going to earn 10% and that means you're

going to end up at the end of year 2

with what it would would that be 10%

that's 11 dollars right so you're gonna

add that 11 dollars to the 110 and

you're gonna have 121 so if you keep

doing that for 50 years then you would

end up with an extra 11 thousand seven

hundred and thirty nine dollars now that

is cool you heard me right

in the compounding example you started

with a hundred dollars and you end up

with almost twelve thousand that's

substantially better than 600 right so

keep in mind that the example assumes

annual compounding whereas many

investments compound more frequently

although in our investing strategy we

don't really consider more frequent

compound that's more like what you'd

worry about in bond rates of return in

case the more frequently interest is

compounded the quicker your money is

gonna grow right so for investors what

that means is compounding allows you to

take a small amount of money invested

real early in your life and if you leave

it alone to compound it'll actually give

you more for retirement that a much

larger amount invested later in your

life so keeping with similar numbers to

our earlier example to demonstrate the

importance of early investing let's take

a look at this the important thing here

is that compounding has its biggest

effect when invested as early as

possible and that point can't be

emphasized too much so this is one of

the reasons we want to teach all of you

guys how to invest because then you're

gonna teach your kids and your kids you

know they're not forty-five years old

they can get started on this when

they're teenagers and then compounding

can make them very very rich in two ways

first once you understand it you should

plan on investing whatever you can as

much as you can as early as you can in

your life so if you're at an age where

it's too late for your life to see major

of

from compounding then look to set up

something for your family for your kids

a little bit of money set aside for the

kids of the grandkids at Birth can grow

into something that makes retirement a

breeze with the magic of compounding so

second you can now consider how lenders

use compounding for any debt you have

you should ask yourself how is that

interest calculated like credit cards

are notorious for frequent compounding

periods those minimum payments they're

specifically calculated to ensure that

you never ever pay the debt off because

you just stick with the minimum in short

they're designed to keep you in debt

forever so keep that in mind whenever

you borrow money as well as when you're

investing when you're borrowing it's

working against you compounding is and

when you're investing it's working for

you

now here's something really really

amazing we go back to the example of

compounding money at 10% a year what if

you could compound that same amount of

money at 26% a year

compounding at 26% a year will double

the amount of money you have every three

years so let's go back to our 50 year

period of time that gives us almost 20

doubles 20 doubles on $100 to us see

where that goes

20 doubles on 100 let's just run through

it really fast that's 200 400 800 1600

3264

12 let's call 12,000 24,000 call 2550

100,000 that's 10 doubles 100,000 200

400 800 1.6 million 3.2 million 6.4

million 12 point eight million caught 13

million 26 million 52 million one

hundred and four million dollars did you

just see that okay we started with a

hundred dollars we compounded at ten

percent for 50 years and we ended up

with twelve thousand we start with $100

we compounded at 26 percent per year we

ended up with a hundred million so do

you think it might be worth focusing

intently on learning how to invest the

way the best investors in the world do

it so starting with virtually any amount

of money you can become wealthy now I'd

love to hear from you guys are you

taking advantage of compounding

investments like you should be leave a

comment below with your answer and I'll

be sure to follow up with you so thanks

for watching now go play if you enjoyed

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