Plenty of people do not understand the principle of compounding interest. It is the basic principle behind acting now and acting later when the decision is what to do with your money. People need to be comfortable making major life decisions. This includes things like buying a house, getting married, and where to put your money. We always hear that time is money. Compounding interest tells us why this statement is true.
Investopedia defines Compounding Interest as;
“Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.”[1]
The principle is rather simple. The earlier you put money into an account, all things being equal, the more money you can make. The interest accumulates upon itself over time. The only two things guaranteed in life are death and taxes. Compounding interest can make the prospect of life and death easier to face. It can also make the volatility of gains and losses easier to stomach.
If you don’t have a ticket you cannot ride the bus. Plain and simple. You cannot grow or lose any money if you put it in your mattress. Look at your home owner’s policy. The limit on money probably doesn’t cover a trip to the grocery store and your local Target. Your current options for savings accounts aren’t going to do much either. According to Value Penguin, the highest interest rate on a savings account is 1.45%[2].
So, what do we do now?
We go to https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator. Here you can run numbers to your heart’s content and see what happens if you wait to invest at age 35, 45, or 55. This site has a lot of tools to help you analyze financial information.
There are a lot of entry points. There’s a lot to understand when making decisions about money. The power of compounding interest is one that is important to understand.
Other terms like liquidity, current, and future needs, and risk tolerance to name a few. Go to investopedia.com for more information on terms like this.
If you would like to see what compounding interest can do for you call me today. 971.303.8508.
You can also visit www.lucascole.com to learn more about my agency.
[1] https://www.investopedia.com/terms/c/compoundinterest.asp
[2] https://www.valuepenguin.com/average-savings-account-interest-rates
