Compound Interest Is Gnarly! (Finance)
July 12, 2024
Compound interest occurs when the interest you earn on savings begins to earn interest on itself. As the interest grows, it starts to accumulate at a rapid pace.
Example: Let’s say you contribute $1,000 annually for the next 40+ years to a random investment that returns 8% annually.
After Year 1 Balance: $1,080
Year 2 Starting: $1,080
Add Year 2 Contribution: $1,000 + $1,080 = $2,080
After Year 2 Balance (after 8% return on $2,080): $2,246.40
It takes time for interest to grow, but I personally think it’s worth it to put some money aside to invest for the future.
Here’s an example I found. the first 10-20 years the there are minimal gains from the principal contributions made, but once you get to years 30-40 things increase quick!
“Time in the market beats timing the market.”
Market Timing = Very low probability of success (a lot of work)
Time in the Market = Very high probability of success (almost no work involved)