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Forget investing until you have THIS
Compound interest can make you rich, but most people forget this one detail.
723 Words | 3 min 3 Sec Read
Albert Einstein is famous for saying:
“Compound interest is the 8th wonder of the world.”
And yes, over time, compound interest can make you rich.
But what if I told you 99% of people should NOT be investing?
Here’s why…
📈 Understanding the Math
The math behind compound interest is simple.
If you have $10,000, and make 10% per year, by the end of year one you will have $11,000.
Don’t have to be Albert Einstein to figure that one out!
Then, if you keep your $11,000 invested at 10%, by the end of year two you will have $12,100.
😩 Where the Math Gets Funky
As you can see here, the profit you make each year is going up.
You made $1,000 the first year, $1,100 the second, and if you stayed invested for year three, you would make $1,210.
But there are three core problems.
All of which are going to make it hard for you to “ball” before you end up in a nursing home.
❌ You Can’t Touch the Money
The first and most obvious problem here is that you can’t touch the money.
Why?
Because for compound interest to work, you have to leave the money there.
You can’t go from a $1,000 gain to a $1,100 or $1,210 gain if you keep taking your profit out to buy new NFTs every year. Bummer.
❌ Nobody’s Getting Rich Off $1,000 Gains
The second problem is how long compounding takes.
If you start with $10K at 10%, by the end of five years, you’re going to have $16,105.
Yes, it’s amazing you can invest $10,000, sit around eating Doritos, and end up with a $6,105 profit after five short years.
But last I checked, six Gs isn’t even enough to make a down payment on a car (let alone a house). Ouch.
❌ Realistic Rate of Return
The third and biggest problem with compounding is your annual rate of return.
In a risk free money market fund, you can get about 4.5% in the US right now. And on average, the stock market returns around 7-8%.
The reason this matters is because the lower your return, the longer it takes to double (and triple and quadruple) your money.
Known as the Rule of 72, you can figure out how long it will take you to double your money by dividing the number 72 by your interest rate.
As an example, if you’re earning 4%, it will take you 18 YEARS to double your money (72/4 = 18). And at 8%, it will take you nine years (72/8 = 9).
Given 18 years is how long it takes to get pregnant, raise a child and ship them off to college, turning your $10K into $20K over an 18 YEAR period is not going to make you rich.
The Lesson: If you’re starting from $0, investing and compounding your gains is not going to help you get rich anytime soon.
🤑 The Good News
In the above examples, we discussed how compound interest would apply to a $10,000 investment.
Now let me show you what happens when you start with $1,000,000.
At a 7% annual rate of return, it will take 10 years to turn 1 Mil into 2 Mil.
And another 10 years to turn $2M into $4M.
💰 Compounding Big Numbers
The Dave Ramsey’s of the world will fight me on this.
But let’s be honest: Turning $100K into $400K over 20 YEARS is not going to make you rich.
Turning $1M into $4M, however, will.
And that’s what no one tells you about compound interest:
It’s not that it doesn’t work. It’s just that it works way better when you start with a big number.
“Men lie, women lie, numbers don’t.”
💡 Parting Thoughts
The above examples are based on cold, hard math.
Yes, if you start investing at 5 days old and contribute $500 every month for 95 years, you can end up a billionaire.
But for the rest of us, who are starting in our 20s and 30s and can’t contribute very much, investing is not going to get you there.
Instead, the surest path to wealth is to make money first, then invest.
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