The Importance of Compounding Interest... (Written by Ben Pincus)
I remember when I first asked one of my kids if they understood the concept of compounding interest. I assume they thought it might be something they were interested in and that interest would compound over time. I was quite surprised to know that they were not introduced to the concept in school and did not really have a clear understanding of how markets and compounding interest can be your best friend when trying to meet your goals.
I wished I had someone like me to tell me about it, the younger the better. I was so glad to be that person for them, financial acuity is a learned skill, no one is born with it. It’s a muscle that needs to be exercised, like working out at the gym, we don’t start with the heaviest weights or hardest routines we start light and build on our gains. In fact, being financially strong requires a process which is much like building your physical body so think of the end at the beginning. Visualize your first marathon, your 315 pound bench press or looking great in that bikini next summer. What are your strengths and weaknesses and how do we play to our weakness to get stronger and bank our strengths as gains?
It is so vital to know that like learning anything else, resources are everywhere and generally they are free; depending on what you want to learn. Let’s start with what compound interest is. Many of you have read this far and do not know. Here are the basics, when you make an investment in any kind of vehicle, stocks, bonds, mutual funds, the financial institution pays you a premium to use your money to
grow their business. This is called interest. Compounding interest is when instead of using that money for a vacation or dinner at the new great restaurant in town you let it stay in that vehicle and get paid interest on the interest you have already earned. This is compounding interest, it's super powerful, and can work for anyone with any amount of money.
At first, it will be small, even negligible, but within a fairly short amount of time it will begin to accrue and grow. In some cases, a lot. Remember the gym, you move from 15-pound dumbbells to 20 pound dumbbells. You may feel stronger but you are not strong enough to triple the weight. Do not do this with investing either.
For most individuals’ mutual funds are the right place to start. Generally, they are professionally managed and focus on groups of stocks lumping many peoples funds together to buy bigger pieces of the market. You can focus on different sectors, things that interest you perhaps, maybe current events to help you make these decisions. There is a fund for that, whatever that is. Although past performance is no indication of future performance, funds with longer histories generally give a fairly good picture to assume their performance going forward.
Without getting too detailed about investing the most important things to glean from this post are, time is your friend so get started! Compound interest can help you meet your goals for children, home ownership, retirement and so much more. The point being why are you still reading this get started now!
I can be reached BPINCUS@BLCTEXTILES.COM I am not a finance professional and do not give advice on specific investments or positions.
Here’s a chart illustrating the power of compounding interest and how time is so important as a part of the equation.
Source: the art of manliness. www.artofmanliness.com