Compounding interest works like a double edged sword and from previous post, I have already highlighted the negativity of compounding interest when applied on credit card debt. Here I will like to show you how compounding interest can be used to expedite your journey towards financial freedom.
The chart below shows three different savers and how their investment style and time frame will create different outcome. The assumption is the compound interest rate is the same for all parties for illustration purpose. Susan invests $5,000 annually between age 25 to 35, investing a total amount of $50,000 and end up with $602,070. By starting young, she is able to harness the power of compounding interest which is positively related to time. The longer the time frame, the more fruits compound interest can produce. This highlights the importance of starting early.
Bill invests $5,000 annually between age of 35 to 60, he invests a total amount of $150,000 and achieve a total $540,741.
Chris is the most ideal and I hope you can follow his footstep, he contributed steadily since age of 25 years old till his retirement age. He is able to achieve a total of $1,142,811.
“Those that don’t understand interest pay it, and those that do understand it, earn it.”
From previous post, I have discussed on how to reduce your debt, once you have clear your debt, it is time to put your money to work harder for you so that one day you do not need to work so hard. If you have learned the rules of financial game, even if you don’t win, you will have a much higher chance of winning or at least playing even.
The financial games should not be games of change, they should be games of choice. You need to respect money and not take things for granted. If you have tracked your expenditures, you will know where and why you are overspending and how to reduce unnecessary expenditure. If you know the rules of compounding interest, you will want to reduce all debt and harness compounding interest as soon as possible.
The objection is the notion that there’s not enough time to know the rules. People do not realize that the last little bit of information which they did not bother to find out would save them a lot of heartache and headache later on. Do not rely everything on others, you need to spend time on these matters. if not well managed, financial related stuff will one day come back to haunt you. For example, it takes 30 minutes to review a legal document. If you do not spend the 30 minutes, some of the clauses will have financial impact on you later on.
Instead of simply trusting others, you need to take full responsibility for your own financial matters. Most people often entrust their financial well-beings to other people. You can trust that the person or entity providing the services will not cheat you and the person is competent as promised. Humans are not perfect and will make mistakes. Hence, it is important to guard your finances and keep track of things. People who knows the rules of financial games will often take advantage of those who don’t.
It is important to know the rules of the financial game so that you can ask the right questions so that people will deal fairly with you while not everyone will be ethical in their dealings. People will know the rules will take advantage of those who don’t.
Learn the Financial Basics
To learn the financial basics involve doing first things first. It is suggested to do the following:
A) The Basics
- Consider getting an education or learning a skilled trade
- Secure a primary source of income
- Avoid getting into debt
B) Cover your risk
- Buy basic life and disability insurance
- Build up your emergency fund
- Create a fund for emotional spending
- Purchase a house
- Reduce your taxes
C) Invest Surplus Money
- Invest in low risk instruments
- Invest in ETFs
- Invest in individual stocks
As you set out to play the financial games, you will gain an understanding to the rules. You need to gain confidence and experience before you take the next step up. With every financial decision comes risk, only through knowledge can you reduce your risk level. God can be forgiving but the market never forget. High return is tagged together with high risk, never forget either one.
- Take your time and effort to read and understand
- Learn the rules
- Don’t trust others completely, it is your own money
- Do first things first
Continuously read and learn, if you are not interested in money, money will not be interested with you too!