Let’s Compound Your Interest

Compound your Interest

Compound interest is an amazing concept that will work harder for you the sooner you start

Many of us procrastinate in our lives and we sometimes fail to do what is important today. It can be much easier to push things into the future even though we know it’s best to begin making plans today.  I think this is especially true when it comes to money and for planning for our financial future. We get distracted because of the demands of our jobs, our families and friends—and just everyday living. There seems to always be demands on our money—repairs to the house, school supplies for the kids, orthodontics, a new car, appliances, clothes—you name it.

When we finally get around to thinking about our financial situation, in most cases we get easily pulled away by life’s demands—many of us get frustrated by not knowing where to start or what changes we need to make. However, it is important to keep our eyes on the ball and on our future. It is much easier to invest a little every month right now, than it is to invest much larger amounts many years down the road.

Our financial objectives are easier to meet when we get our 401(k) plans and IRA accounts organized and allocated efficiently right now, than it is to keep our heads in the sand figuring we will get to it later. You need to put the principles of compound interest to work for you—now.

 

The Value of Compounding

As an example—If you want to accumulate $500,000 by investing monthly, assuming your investment grows at an annual rate of 10%, compounded monthly, you need to start this month and here’s why:

  • If you have 30 years to accumulate—your monthly investment will need to be $221.19
  • If you have 25 years to accumulate—your monthly investment will need to be $376.84
  • If you have 20 years to accumulate—your monthly investment will need to be $658.44
  • If you have 15 years to accumulate—your monthly investment will need to be $1,206.36
  • If you have 10 years to accumulate—your monthly investment will need to be $2,440.87

As you can see, the monthly investment starts to increase significantly as we wait. For many people, it is possible to start investing $221.19 on a monthly basis right now. I didn’t say it would be easy, but it might be possible to find this money in your budget if you really focus on doing so. However, for most of us, trying to squeeze $658 or $1,206, or even worse, $2,440 is out of the question. What this means is that for most people, due to procrastination—caused by a multitude of reasons—what was once a “doable” task becomes an impossible task. If we can squeeze $221 out of our budget now for investing, but there is no way to think about tripling that monthly investment to $658, then we should make sure we do the possible now by taking action.

 

What About Inflation?

Some of you might be saying that with inflated dollars these higher monthly amounts will become more manageable when the time comes to get serious—but in reality that never seems to be the case. With high inflation comes higher demands on our money and of course less value for our accumulated funds.

Instead of thinking like that, think about how much you will be able to accumulate later if you are able to start to invest now—this month—and as inflation increases your income, you will be able to invest even more each month. This will enable you to reach your financial goal sooner or you will simply have much more accumulated in your investment accounts.

In either case, starting now is much more advantageous and palatable. One of the reasons for starting now is to start to develop a healthy investment habit—a winning habit. Another reason is developing the right mindset—one that empowers you—not one that causes worry and anxiety.

In summary, you should do everything possible to stop procrastinating and to start investing monthly, now. This way, you’ll begin to immediately compound your interest. Your failure to do so might mean you are never able to meet your goals. You will never realize financial peace by acquiring more stuff. You need to learn to live on less and have money to invest. Once you apply this principle you are on your way to financial success.

Live Your Dreams

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Randy Tudor is the VP of Investment Research for Margin of Safety Investing, LLC. He has over 35 years of experience in financial services, real estate, taxes, and accounting. He currently resides in Phoenix, Arizona, where he heads up the investment research and analysis team by focusing on companies with strong fundamentals, a durable, competitive advantage, honest and talented management, and which can be acquired for a margin of safety price.

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