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S3E2: The Power of Compound Interest
Manage episode 352374968 series 2971928
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Grow your wealth with interest and patience
What Determines How Much Compound Interest You Can Earn?
There are three main factors that can influence the rate at which your money compounds:
- The rate of return, or the profit, on your investment
- Time
- The tax rate, and when you have to pay taxes on your interest
Compound Interest and the Time Value of Money
The foundation behind compounding interest is the concept of the time value of money, which states that the value of money changes, depending upon when it is received. Compounding allows that money to grow.
Opportunity Cost: The loss of possible gains if an action is not chosen.
Compound Interest Calculators:
A Higher Rate of Return Often Comes With More Risk
Low RiskK high-yield savings account, certificates of deposits (CDs) and money market accounts
More Risk: Stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds, Investment Real Estate
High Risk: Startrt ups, Crypto and NFT’s, Options
Indexing is available within the structure of certain specialized life insurance policy’s to provide you the upside potential of the market and a limit on the downside risk.
Frequently Asked Questions (FAQs)
Definition of compound interest?
Compound interest is when you earn interest on top of the interest you’ve already earned on the principal amount of money.
For example, if you started with $10,000 and earned 10% interest in one year, you’d have $11,000 after one year. If you earned 10% on that $11,000 over the course of another year, you’d end up with $12,100. Compound interest is the money you earned in that second year because the interest applied to your original principal and the interest you earned in the first year.
I’ve included two links in the show notes for you, but if you want to do it manually, you’ll need to follow this formula:
Multiple your annual interest rate by your principal starting value. Add the result to the principal starting value. This is your new principal value. Repeat the process. For example, 10% x $10,000 = $1,000, $1,000 + $10,000 = $11,000, $11,000 is your new principal balance.
Start Your Free Wealth Coaching: Text me at 508-905-5561 with a couple dates and times and let’s begin building a financial wall around your family.
The post S3E2: The Power of Compound Interest first appeared on The Family Business.
The post S3E2: The Power of Compound Interest appeared first on The Family Business.
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