Fiology: The Study of Financial Independence (FI)

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This is the header image for the Fiology lesson Compound Interest Can Make You Rich! It displays mature trees to act as a metaphor for the how compound interest grows and strengthens our net worth over time.

Compound Interest Can Make You Rich!

Compound Interest has been referred to as the 8th Wonder of the World. If Einstein actually said that is debatable but what isn’t up for debate is the exponential impact it can have towards wealth creation. Sure, we’ve all heard the term Compound Interest but how many of us have truly explored its power?

How do I Calculate Compound Interest?

We calculate compound interest by using the formula:

FV = PV × (1+r)n

FV = Future Value, PV = Present Value, r = annual interest rate, and n = number of periods

Unless you just love memorizing formulas (hey, some people do!), there are more convenient ways to calculate your future riches. Here is a calculator for compound interest found at investor.gov. 

This lesson refreshes our understanding of compound interest and brings to the forefront the positive effect it can have in our lives and in the lives of those we care about. As we go through these presentations, attempt to focus on the element of time and how even a seemingly small money move made today can result in long-term wealth.

Read:

Watch:

Take Action:

  • Use the simple Moneychimp.com Compound Interest Calculator and experiment with the variables based on a very real situation in your life. For example, if we chose to invest $3,000.00 initially for a child and make that same contribution at the beginning of each year at a conservative 8% return for 30 years, our child will have nearly $400,000.00 at the end of that period. Or, if we receive an inheritance of $73,000.00 at the age of 35 and invest immediately, assuming the same conservative 8% return, we would have about $500,000.00 by the time we turned 60 years old.
  • Consider where you may be able to allocate an increased portion of your income to long-term growth. Take immediate action. Increase a retirement account contribution by $100.00 per month or increase your child’s college savings by 50.00 per month. (These are just examples, make a change you can justify, but do something now.)

Additional Resources:

  • CFK Podcast 021: The Power of Compound Interest  by Dr. Matt Motil of drmattmotil.com. Focus on the math in this podcast. It is biased towards real estate, which works for many, but the primary value of his presentation is the power of Compound Interest.

Quote:

“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett

Fiology.com is an educational resource designed to teach Financial Independence (FI). We scoured the internet to find content from the best and brightest of the FI community and created lessons covering the critical concepts.

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