The Greatest Invention in Human History – Compound Interest

Albert Einstein said, “The most powerful force in the universe is compound interest” or was that Socrates? Anyway, don’t believe everything you read on the internet.

Compound interest may not be the most powerful force in the universe but it’s the secret sauce to wealth accumulation. Simply, let your money go out and make you more money.

I get it – right now it’s hard to find a savings account that will pay you more than 1% – and even the orange guys are only giving you this pathetic rate for the first 30 days. How the fuck are you going to grow your stash when it’s gonna take you 50 years to make a $100 in interest?

This is not a reason to give up. It’s THE reason that you need to go down to the bank and politely ask them to invite you to dinner before they screw you – Right NOW! Those braindead GICs they offered you @ 1% aren’t gonna help much either. It’s time to go out and put some nuts on your truck and investigate some better options.

Start with broad-based ETF (Electronically traded fund) full of juicy dividend-paying companies. While not as sexy as investing directly with Elon Musk at least you know that your money isn’t gonna be blown up in a rocket, sent to mars or turned into a Delorean truck car El Camino – What is that anyway?

There are several diversified ETFs that currently pay a dividend around the 5% mark with little risk when compared to the reality of inflation. So even if you think Trump is going to end the world – resist the urge to bury your cash in the backyard and start up the internet and type in “Reits, Preferred, Aristocrat, Dividend ETF”. Do your research, it’s gonna get wild – make sure you close the door.

I love charts! Below is what 10K looks like when left in a 1% savings account for a 10 year period. And it SUCKS. Look at the results – horrible – as pathetic and cringe-worthy as this dude trying to explain his water bottle paper thingy.

Did I say that I love charts! Below is 10K invested in a diversified dividend ETF yielding 5% for a 10 year period. Even the nonbelievers have to be converted. The math doesn’t lie. An extra 5 large in your pocket vs a standard savings account.

Even more CHARTS! Below is the same 10K invested but this time using interest and dividends to automatically purchase more shares that pay more dividends that buy more shares that pay more dividends. Sorcery! This is called a DRIP the ultimate way to compound and you can do it too.

You can expect to double your money every 10 years, using an ETF that holds a basket of stocks yielding 5%. This is about as safe and boring as your BIL the accountant.

The difference between wealth accumulation and debt is what direction you decide to go. If you are some type of masochist and enjoy learning things the hard way, don’t pay off your credit card every month and compound interest works equally as well but in reverse. Every year you hold a balance on your visa you could pay double if not triple the original purchase price. Ouch.

Ready? What do you get when you add a donut and a pie together? A FUCKING awesome chart! And a sudden urge to visit Tim Hortons.

“My wealth has come from a combination of living in America, some lucky genes, and compound interest,” ~ Warren Buffett

Don’t be a chump. Pay off your debts and start investing for your future self – NOW. And don’t hate rich people because they’re rich and you’re not. That’s lame. Make the choice to let your money work for you, instead of working for your money. Start compounding.

Author: The Money Runner

Husband, father, runner, personal finance enthusiast and computer geek. Thanks for visiting. Please check out my other posts and follow me on Twitter and Facebook.

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8 Comments

  1. Nah. That was abraham lincon. Get you fake news right. Brah.

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  2. If you invested $10,000 for 5 years at 5% per year, with interest paid at the end of the term, you would earn $2,500 in simple interest after 5 years, $500 for each year. This would give you a total of $12,500 after 5 years.

    If you invested $10,000 for 5 years at 5%, with interest calculated and added monthly, you would earn $2,834 in compound interest after 5 years, giving you a total of $12,834. Returns would be higher because you’d earn interest on the interest.

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    • Simple interest vs compounding interest. A great way to illustrate the difference. Thanks for sharing.

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  3. There should be a law that if you overdraft any account the maximum the bank can charge you is the equivalent interest they pay out on savings accounts which is next to nothing these days.

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    • Or you could invest in a diversified financial ETF and reap all the benefits of the fools who use an overdraft. Just sayin. Thanks for the comment.

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  4. Thre is a key disadvantage to DRIPs, in my opinion: That you lose control over your capital allocation decisions. If you have several stocks in your portfolio, and you add to your positions at attractive prices, then DRIPs take away from the cash you have to add at those prices. And what if the company paying the dividend is overvalued at the time? Even with the discount, you may be buying too high.

    I prefer to retain control of where – and when – I invest my capital.

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    • Right. But you pay no commission on a DRIP and timing the market is a fool’s game. The best time to invest is when you have the money. Thanks for the comment.

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