Compound Interest: The Financial Superpower we ALL Possess

Hello Everyone! Hope you’re all having a wonderful day so far.

As we begin to gear up to begin our investment journey I wanted to take this week to talk about a special concept that can define your future as an investor. It’s a specific technique that younger generations can utilize for tremendous results and something that older generations must implement now! This concept is known as….

COMPOUND INTEREST

But what is compound interest and how does it work?

Compound interest is the result of continuous cash contributions into your investment pool that build up as time matures. The continuous input of cash allows the investments to stack on top of one another (or compound) over time through the use of dividends (reinvested money earned from investment earnings) as well as time because the American economy has always proven to increase over time.

An example of “compound interest”

A notorious example of compound interest within the financial community goes a little something like this.

A farmer walks into the king’s castle and requires payment for growing crops all year long. The king is willing to pay the farmer one million seeds for all that he has done. The clever farmer then proposes,”I have another idea! What if you start with one seed and double it every day for 30 days?”. The king unknowingly agrees to this plan as it seems like a lot less than what he initially agreed on. However, as time went on, the king soon realized that this would result in over FIVE MILLION seeds.

What a trick the farmer had played! He knew the ultimate tool to increasing gains over a period of time. This example perfectly illustrates how we as investors possess this same trick that the clever farmer proposed to the king.

Through continuous investment over time, we have the potential to gain maximum returns.

So Andrew, what does this mean for me?

It means you need to start investing NOW.

Every second that is wasted is a missed opportunity to maximize returns. I’m not saying put all of your money into the stock market in one big lump sum. BUT, what I am saying is you should be putting your money in the market continuously regardless of the condition of the market.

Yes, I know this sounds like a very backwards concept because everyone has heard buy low, sell high. Next week, I will be writing exactly why this can be detrimental to your future gains through something known as “dollar-cost averaging”

Thanks all and if you have any questions don’t hesitate to reach out on my instagram or send over a comment in the contact section!!

Andrew Martinez, owner and writer of Minerva Money

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Published by Andrew Martinez

Owner and writer of Minerva Money, a blog on personal finance for the average person who is interested in taking control of their future and alleviating themselves from the burden of uncertainty. I have a deep passion for helping those around me with not only finance but mental well-being so if you have any questions or just want to talk don't hesitate to reach out!

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