Learning how to earn compound interest can be one of the most powerful and important decisions someone can make in their life. That is my goal for this video. To teach you how to earn compound interest by investing in the stock market and grow your wealth. One common misconception I want to address is that you only earn compound interest when you reinvest dividends. This is false. Any stock can compound your money if they grow their business. The compounding comes from the overall growth of the company and is not dependent on the dividend. When non-dividend paying companies like Netflix earn money, instead of paying it out to shareholders and losing the cash, they reinvest it themselves. This reinvestments makes to company more valuable, which in turn makes your investment and shares worth more money.
Another thing I mentioned in the video is a little tip to help you save and invest more money that I personally use. $1 invested in the stock market at an 8% rate of return will grow to over $21 through the power of compounding. Anytime you are buying something or shopping for stuff you don't necessarily need just think to yourself "every $1 you spend is a dollar that won't grow to be $21". You'll find yourself not only saving more money, but also ramping up your investing. For example if you're considering buying a new jacket that costs $40, think to yourself "Is this jacket worth $840". Another way to put this in economics terms by the opportunity cost. When you buy something the opportunity cost is the money those dollars could've made if they were invested.
Albert Einstein referred to compound interest as "The eight wonder of the world". Warren Buffet said "My wealth has come from a combination of living in America, some lucky genes, and compound interest". I'm not one to argue with one of the smartest men to live and one of the richest. Compound interest is a way anyone can build wealth over a long period of time relatively easy with some consistency. The way compound interest works is that you invest your principal amount in the stock market in order to earn interest. This interest begins earning interest of its own which grows the principal which leads to more interest and the cycle goes on and on. The growth is really slow and boring in the first 5, 10, and even 20 years.
Index funds are a great way to earn compound interest in the stock market as appose to picking individual stocks. Picking individual stocks is very difficult and the odds are not in your favor to outperform the market over a 10-15 year time period. Even most professional money managers can't do it. The solution to this is index funds. Index funds are a collection of stocks that are grouped together to track performance. The S&P 500 is a very popular index of 500 blue chip stocks here in America. By investing in an index such as the S&P 500 you own a small piece of every company in the index. This eliminates most of the risks associated with purchasing individual stocks. If one company goes bankrupt it's not a big deal because you have 499 other companies to pick up the slack. Not to mention the S&P 500 has averaged a 10% rate of return from 1926-2018.
Time is the most important factor when it comes to investing and earning compound interest. The younger you are and the longer time horizon you have, the better your results are going to be. In the video I gave a few examples. If you invested $15,000 at an 8% rate of return over 20 years that number would grow to $100,912. But if you let it sit for another 20 years and don't add anything to it you'll be left with $678,888. Pretty ridiculous how just letting your money sit for longer provides you with substantially more money. The absolute coolest thing about this example though is that waiting one last year from 40 to 41 you will have $746,777. Over $68k just by waiting another year. Now imagine what the numbers would be if you made regular contributions.
I hope you guys enjoy this video!
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Helpful Investing Books
1. Rich Dad, Poor Dad by Robert Kiyosaki
2. Think and Grow Rich by Napoleon Hill
3. The Simple Path to Wealth
4. Kindle
5. Total Money Makeover by Dave Ramsey
6. How to Day Trade for a Living by Andrew Aziz
7. A Beginners Guide to Investing
8. The Millionaire Next Door
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Disclaimer: This video is an expression of my opinions. I am not a financial advisor and the content in this video is meant for educational purposes only. Always do your due diligence when considering investment options. This page does contain affiliate links which means that for no additional cost if you use the link to purchase a book I will receive a small commission.
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