I get it, you probably don’t have a ton of money to invest with right now. Chances are you don’t have a full time job, probably just a summer job. Interestingly enough, I’m in the same circumstance as you. But what I do have that you don’t, is the understanding of compound interest in the stock market. Compound interest WILL grow your money at a much bigger rate than you would expect it to. The only requirement is time.
What is compound interest?
You have defiantly learned what this is in the past, but let me explain in stock market terms. Compound interest is a growing rate on the money you put it, PLUS the returns you have already gotten. An example will explain better…
The overall stock market grows an average of 10% a year. If I invested $1,000 in a fund that tracks the overall market and never added any more money.
After one year I would earn 10%, so my balance would be $1,100. The second year I would earn 10% on that $1,100. Bringing my balance to $1,210.
- Year 3 ending balance= $1,331
- Year 4 ending balance= $1,464
- Year 10 ending balance= $2,593
- Year 20 ending balance= $6,727
- Year 40 ending balance= $45,259
- Year 50 ending balance= $$117,390
What if I add $150 a month to this account…?
Again, if I have an initial investment of $1,000 into a fund that tracks the overall market at 10% a year. EXCEPT this time I add $150 a month to it, lets see the returns.
- Year 3 ending balance= $7,289
- Year 5 ending balance= $12,600
- Year 10 ending balance= $31,281
- Year 20 ending balance= $109,822
- Year 30 ending balance= $313,538
- Year 40 ending balance= $841,925
- Year 50 ending balance= $2,212,426
Yes, 2 MILLION DOLLARS when all you do is invest $150 a month!!
A 10% yearly return is what the market has been giving for decades now. So to say, “What if this happens, what if that happens…” is nonsense. However, a 10% return is only if you invest in the most conservative and safe way possible. Nothing wrong with it, but there is so much more potential.
A 12% to even 15% yearly return is attainable if done right. 20% can be done some years, with a special skillset. It can make all the difference over time. Investing in individual companies as oppose to the overall market will make this happen. That is exactly what we do here. Personally, I hold about 15% of my stock portfolio in total market tracking funds. The rest is individual companies that I believe in. A lot are considered “riskier,” but I’m young and that’s what I should be doing.
Financial advisors all over will say the same thing. Young individuals with little money into the market, should be in riskier stocks. We don’t have a ton to lose, but so much to gain.
Keys to understand
From this post you should have concluded 3 very important things.
- Start investing now!!
- It is about time IN the market. The more time your portfolio is exposed, the more compound interest it will recieve.
- Investing a certain amount per month, returns you nicely later in life. It does not have to be $150 right now, maybe its $75. But, when you do have a stable income make it a few hundred… you deserve it.
These 3 charts all have the same credentials…
– $1,000 initial balance
– 13% yearly return (Easily attainable return)
– 40 year time frame
$75 monthly contribution for the next 40 years
$150 monthly contribution for the next 40 years
$300 monthly contribution for the next 40 years
Want to visualize compound interest more? Check out this link: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator