Make Compound Interest Your BFF

compound interest / start investing early / time is on your side / money makes money

Who wants to become a millionaire with their eyes shut?

You can, through the power of Mr. Compound Interest! I will show you how in an example later.

First of all, what is compound interest?

Now, I’m going to tell you a somewhat embarrassing story about me that will help you today.

For the longest time, I had no clue what compound interest was. Despite being taught time value money (TMV) and the effects of compounding, I didn’t really nail that concept into that thick head of mine ’til many years later.

It was the summer of 2008 and I attended one of my boyfriend’s (today, my fiance) boring lectures in University. It was a financial risk management course taught by a tall Asian man in his mid-40s.

For goodness sake, what 20-year-old would want to sit in a three-hour lecture listening to some nerdy Asian dude blab about Monte Carlo methods, volatility forecasting models, Black-Scholes-Merton model, delta hedging, etc. etc.??

Ah, I probably lost most of you there already…

compound interest / money makes money / money works for you
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To be honest, I was only sitting in because I wanted to be with my boyfriend at that time. How pathetic, right? Hahahaha…

Not surprisingly, I fell asleep for the entire three hours.

It wasn’t until the last ten minutes before class ended, that the Professor’s speech caught my attention.

I’m not sure why he brought up the topic of TVM, but I vividly remember him saying, in his hilarious Asian accent:

“Ah, compound interest! This concept intrigues me SO much because it can make ANYONE rich over time!”

 

He went on explaining the mechanics of compound interest, but the “it can make anyone rich blurb was the only part I got out of it.

Even after teaching us how compound interest works, I still had no idea (that’s because I wasn’t paying attention).

Without getting into the math, compound interest is like pushing a snowball on a snowy day. It gets bigger and bigger as it accumulates snow.

Compound interest snowball
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Here, Wikipedia explains the definition better than the Professor:

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

 

In the end, what the Professor said was true. Compound interest (even after inflation) can make anyone rich over time!

In fact, Warren Buffett will tell you that it’s one of the main ingredients that got him rich over the years. Although you may not become as rich as Buffett, it’s still a mechanic you can mimic with success.

The catch?

Well, you just gotta be patient!

I honestly wish I understood this concept earlier in my life. Now I’m blogging about this because I hope someone who doesn’t know will find it helpful.

Here’s how compound interest can benefit you. So, make him your BFF (best friend forever) today!

 

money makes money / compound interest investments / compound interest math / compound interest for kids via www.finsavvypanda.com

 

1) You don’t have to be a mastermind

Yes, you can be a dummy and still become rich (not that I’m saying you are)!

From time to time, my fiance jokingly calls me a dummy. Yet, my investments have been compounding since the day I started investing.

As you can see, my fiance is the Brain in our relationship. You can guess who I am, right?

 

 

My fiance doesn’t see it and won’t admit to this, but he’s pretty damn smart (both nerdy and street smart). He’s the guy with high distinction on the dean’s list. He achieved an amazing CGPA. Particularly, economics, FINANCE, and business were his strengths.

At work, his team members and other stakeholders rely heavily on him and his inputs because of his brilliant ideas. He knows his financial products and the business very well. If he’s crusty, all he needs is a quick review and it will become solid again. I’m trying to make a point and he’s going to kill me for writing all of this stuff about him. Oh well, too bad…

Overall, he’s bright and well-respected.

BUT… when we look at our investment accounts separately, he would tell me how jelly he is to see my money grow faster than his. We both think it’s crazy because he earns 60% more than I do.

compound interest / money make money / start investing
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I know our time horizon is too short to tell, but here are some reasons why I think the dummy (me) ended up beating the smart guy (my fiance):

– more of my investments track the basic index (no fancy stuff here, I keep it simple)
– I follow dollar cost average (DCA) strategy more than he does
– He tends to have more risky behavior than me
– He reads too much into markets and stock trends (I ignore the noise). This caused him to time the markets.

In addition to that, there was a time where he held onto too much cash and for too long because he wanted to catch the right opportunity. Why not just pay off your student loans at that time?? But I talked him into buying index funds. So, for some parts, he started a bit later than me.

My point here is to tell you that you don’t have to be some scholar to reap the benefits of compounding. Anyone can do this, but I know most won’t because they lack patience.

 

 

2) You don’t have to deprive yourself to reap the benefits of compound interest

I’ve read SO many blogs where people write about cutting your daily coffees to reap the benefits of compounding. For all those coffee lovers out there, are you really going to stop buying a cup or two until you reach 65?

Just this morning, I came across this awesome post that says cutting your daily lattes won’t add up much. His pin on Pinterest caught my attention because I loved his raw title “Drink Your F*cking Latte: Why a Small Budget Cut Won’t Add Up!” Okay, okay… his pin said “freaking” but his actual title is “f*cking,” LOL!

If there’s one thing I absolutely loved, it’s this Mickey Mouse GIF he used to illustrate his point…

Oh man, I had a great laugh after reading this!

 

 

In my last week’s article, I also wrote about how you can start saving (and spending) money the sexy way so that you don’t have to feel deprived while reaching your financial goals.

Overall, saving is vital, but you gotta find the right balance. You want to enjoy life (not deprive yourself) while reaping the benefits of compounding.

 

 

3) You don’t have to be Warren Buffett, Bill Gates, or Jeff Bezos

In other words, you don’t have to be rich. If you’ve been following me, you will know that both my fiance and I came from poor families. Yeah… 🎵 we started from the bottom now we here… 🎶

Anyone a Drake fan?

As mentioned above, Warren Buffett says compound interest played an important role in his success. In this post, I wrote how Buffett started off by selling gum, pop, and newspapers door to door. At a very young age, he had an entrepreneurial mindset of buying low and selling high. By the time he reached 11 years old, he invested in his first stock!

He admitted to making many investment mistakes, but overall, we know he didn’t start off rich. In fact, 99% of his wealth was earned after his 50th birthday according to Business Insider. He worked hard and smart, but time and compound interest were major factors in his success.

 

 

4) You have time to build your friendship with Mr. Compound Interest

The younger you are, the more time you’ll get to spend with Mr. Compound Interest. So, be loyal and spend more time with him. Down the road, he’ll have your back and you will be thankful for the payoff (no pun intended here).

Any simple investment such as the S&P 500 will compound over time when you set it and forget it.

 

Example of Pinky and the Brain. Who’s the loser?

To give you an example, let’s look at two scenarios.

 

Pinky

Pinky (me) starts saving and investing $6,000 per year at age 20 and stops when she reaches 30. At this age, she will never save another penny again. Just sit back and see how much her investment grows.

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Brain

Brain (my fiance), on the other hand starts later by ten years, at age 30. He wants to catch up to Pinky so he will save $6,000 per year until he retires at 65.

Suppose Pinky and Brain invest in the same index fund that yields 7% return annually, in nominal terms.

 

Pinky   Brain
Age Investment Expected Value   Investment Expected Value
20 $6,000 $6,420 $0 $0
21 $6,000 $13,289 $0 $0
22 $6,000 $20,640 $0 $0
23 $6,000 $28,504 $0 $0
24 $6,000 $36,920 $0 $0
25 $6,000 $45,924 $0 $0
26 $6,000 $55,559 $0 $0
27 $6,000 $65,868 $0 $0
28 $6,000 $76,899 $0 $0
29 $6,000 $88,702 $0 $0
30 $0 $94,911 $6,000 $6,420
31 $0 $101,554 $6,000 $13,289
32 $0 $108,663 $6,000 $20,640
33 $0 $116,270 $6,000 $28,504
34 $0 $124,409 $6,000 $36,920
35 $0 $133,117 $6,000 $45,924
36 $0 $142,435 $6,000 $55,559
37 $0 $152,406 $6,000 $65,868
38 $0 $163,074 $6,000 $76,899
39 $0 $174,489 $6,000 $88,702
40 $0 $186,704 $6,000 $101,331
41 $0 $199,773 $6,000 $114,844
42 $0 $213,757 $6,000 $129,303
43 $0 $228,720 $6,000 $144,774
44 $0 $244,731 $6,000 $161,328
45 $0 $261,862 $6,000 $179,041
46 $0 $280,192 $6,000 $197,994
47 $0 $299,805 $6,000 $218,274
48 $0 $320,792 $6,000 $239,973
49 $0 $343,247 $6,000 $263,191
50 $0 $367,274 $6,000 $288,034
51 $0 $392,984 $6,000 $314,617
52 $0 $420,493 $6,000 $343,060
53 $0 $449,927 $6,000 $373,494
54 $0 $481,422 $6,000 $406,059
55 $0 $515,121 $6,000 $440,903
56 $0 $551,180 $6,000 $478,186
57 $0 $589,763 $6,000 $518,079
58 $0 $631,046 $6,000 $560,765
59 $0 $675,219 $6,000 $606,438
60 $0 $722,485 $6,000 $655,309
61 $0 $773,058 $6,000 $707,601
62 $0 $827,173 $6,000 $763,553
63 $0 $885,075 $6,000 $823,421
64 $0 $947,030 $6,000 $887,481
65 $0 $1,013,322 $6,000 $956,024

 

Results of Pinky and the Brain

As you can see, Brain may be smart, but he cannot beat the power of compound interest. He invested for a total of 36 years. On the other hand, Pinky invested for 10 years only. Yet, he’s still behind her by $57,297.

Who’s the loser now?

Compounding interest / start investing early / time value money
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Summary Pinky Brain
The Age Pinky/Brain Starts Investing 20 30
Investment $500 per month $500 per month
Years of Investing 10 36
Total Investment $60,000 $216,000
Rate of Return 7% 7%
Expected Value on their 66th Birthday $1,013,322 $956,024

 

Overall, my point is that time becomes your best friend, especially when you start developing a relationship with him in your early years.

But even if you’re in your 40s, don’t fret! You still have time to become good friends with Mr. Compound Interest. The best time to become friends was yesterday, but the second best time is now!

To show you that you can become a millionaire, we created a free tool that you can download. Read this post to claim your awesome millionaire [financial freedom] tool! We know that everyone’s situation is unique, so the post will also explain how to use this tool.

 

5) Mr. Compound Interest is your cute little minion

Did I mention earlier that he’s got your back?

Yeah, just don’t abandon him half way and he’ll stay loyal to you. He will eventually work harder for your than you work for yourself. So, hang on tight, buddy… he’ll shower you with lots of love one day. You just gotta give it some time…

 

Summary

There you have it. Five reasons why compound interest will work for you (again, no pun intended here).

In sum, you don’t have to be a finance wiz or Warren Buffett for that matter. You also don’t have to deprive yourself of fun while reaping the benefits of compounding interest. All you have to do is be smart with your savings, start early, and become best friends with him.

Over time, your minion will work harder for you than you work for yourself. Isn’t that amazing? The only catch is, you gotta be patient — just like how you’re patient with your other long-term friends. Though, I wouldn’t call your friends minions, LOL. But like any other good ol’ friendship, it pays off really well in the end! 🙂

 

 

Over to you

What are you waiting for? Have you started becoming BFFs with compound interest yet?

 

Did you enjoy this post? If so, don’t forget to share it on Pinterest! 🙂

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compound interest / money makes money

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You Can Live Like This Billionaire: Here’s How!

10 Ways To Develop a Rich Mindset: #10 is Seriously Mind-Blowing!

15 Financial Goals That You MUST Achieve: What’s YOUR Score?

 

If you like what you read, feel free to pin my posts! Don’t forget to subscribe (at the yellow bar on top) for more weekly money tips and inspiration! I promise that I do not spam. I also do not share anyone’s information.

 

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34 Comments

  1. I feel that anyone who reads this post will realize they too can be friends with Mr. Compound Interest He definitely loves to love, is loyal, and share the wealth…so yeah, why not be friends with Mr. CI?!

    Did I miss it anywhere else – or is this the first Bitmoji of Mr. Fiance?! I knew he was illusive like Mr. DS…glad he came into the picture!

    Speaking of Mr. DS, he knew who Drake was when I asked the other day, “Oh yeah, he’s really big.” Oops, am I missing out?…my amazon prime station is still on 90s grunge…

    Great post, layout of numbers and summary! Keep it up!!!

  2. Great post, compound interest is amazing ! I have been teaching my kids about starting early and saving on a regular basis. I will get them to read your post.

    1. Hi Steve! That’s awesome that you’ve been teaching your kids! What a great parent you are 👍

      Thanks for mentioning my post to them. Hopefully they won’t be bored about the topic hahaha!!!

      Thanks for stopping by. I can’t wait to check out your page 😊

    1. Hey man who’s hungry for money lol!

      Glad you enjoyed the post.

      Yeah it’s crazy when you look at the numbers but math doesn’t lie!! Einstein doesn’t lie! Haha let money do your work 😉😉

  3. That’s a really cute picture of BFF’s!!

    Awe you hold your fiancee in high regards, he should be proud that you are speaking so highly of him (except your portfolio is doing better!)

    Great explanation of compound interest, bringing back Pinky and the Brain that was the best cartoon!
    GYM recently posted…Should You Rent Out or Sell Your Condo?My Profile

    1. Hey GYM!

      Thanks, when I was browsing, I thought it would make a nice pic. I don’t think anyone thinks of Compound Interest as fun, cute or happy so I thought it would a good one to use for such a “boring” topic.

      Lol, my fiancé killed me… he found out and said to not write the good stuff about him haha >.<

      And yes… pinky and brain are so adorable 😊

  4. Excellent post about our BEST FRIEND…Mr. Compound Interest:)

    My fiancée struggled (actually still yells at me sometimes) when I force us to load up our index funds for the year before we begin to save for our other big goal purchases, but it’s because of compound interest. It may not be fun in the short term, but anyone who has ever experienced Compound Interests BIG effects later on in their investments, understand how important it was to start early. That snowball will be way bigger than you could have ever imagined when you finally begin to play with it!

    Great post!
    Sean @ Frugal Money Man recently posted…Don’t Laugh at Marcus Williams…You Have Been Making the Same Mistake for YearsMy Profile

    1. Hey Sean!!

      hm… they always say happy wife, happy life 😀 hehehe

      Yes, anyone can see the huge effects later on in life if they become friends with Mr. Compound interest from a long time ago.

      It’s also important to have some fun at the same time. Balance is key and I’m sure you and your fiance are already setting a good balance! Both are you are already ahead of the game for starting early. Keep it up, man!! 😀

  5. Great explanation of compound interest. I wished I knew the concept of it as well when I was going to school or else I would have invested at a younger age.
    Hopefully more people know how compounding works, like you said it you don’t have to be a wiz to get the concept of it.
    Kris recently posted…My 2017 Expenses Sankey StyleMy Profile

    1. Hi Kris!

      Yeah, I feel that any person who understands it will wish they knew sooner. Those that don’t won’t really care, haha!

      I honestly wish I could talk to everyone in their teens to early 20s about compounding, but they will think I’m nuts. Even some people in their 30s or even 40s don’t know this. Those that know it and use it will be rewarded BIG TIME 🙂

    1. Whoever can be patient will reap the HUGE rewards 🙂

      Crytos can make you rich. But those who banked their entire life savings (ya, we’ve all heard crazy stories) don’t know what they’re getting themselves into… 😐

    1. Thanks for your kind words, Enoch!

      Monte Carlo, volatility forecasting models, Black-Scholes-Merton model, delta hedging are all SEXY and IRRESISTIBLE topics, aren’t they? hahaha…

  6. But FSP what if you are extremely impatient and yearning for a an RS& Audi today? Are you telling me I have to wait forever!

    Juuuust kidding! Compound interest is amazing and I am already feeling it about five years into my serious money saving journey. I love planning for the future now with some momentum it gets so much more fun as the journey continues.

    I wish I could share that with all those struggling to get started.
    Damn Millennial recently posted…7 Reasons I Pay Down My Mortgage In Place Of A Bond AllocationMy Profile

    1. Oh, DM! You will get your Audi R7 soon… you’re going to become SO rich that this car will cost peanuts to you. It would be like buying a toy car haha 😉

  7. Hello ,

    I saw your tweets and thought I will check your website. Have to say it looks very good!
    I’m also interested in this topic and have recently started my journey as young entrepreneur.

    I’m also looking for the ways on how to promote my website. I have tried AdSense and Facebok Ads, however it is getting very expensive.
    Can you recommend something what works best for you?

    I also want to improve SEO of my website. Would appreciate, if you can have a quick look at my website and give me an advice what I should improve: http://janzac.com/
    (Recently I have added a new page about FutureNet and the way how users can make money on this social networking portal.)

    I have subscribed to your newsletter. 🙂

    Hope to hear from you soon.

    P.S.
    Maybe I will add link to your website on my website and you will add link to my website on your website? It will improve SEO of our websites, right? What do you think?

    Regards
    Jan Zac

  8. Great post, I love the simplicity you used to explain compound interest!
    I wish someone explained me the power of compound interest when I was 20! But I wasn’t that lucky, or smart, to find out soon enough! But as you said, now it’s better than never! 🙂

    1. Hi Sara!

      Thanks for your kind words. Yes, it’s only when we understand it that we wish we knew sooner :'(

      As you say, better now than never!

      And get out… you are a smart cookie 🙂

    1. Hi JoeHx!

      You are so right… humans can never be patient. Only those who can should be rewarded with the HUGE pay off 🙂

      Thanks for dropping by!!

  9. Hey Ms. Panda. When the you visited DD the other day, you mentioned you were having writers block. A suggestion popped into my head: You have a great net worth summary and many interesting investments (a large a balance for such a young panda too). Consider writing about your holdings, your real estate, your tax advantaged accounts and how you use them, your stocks etc. etc. I could go on and on with ideas.

    I’m an investor at heart so when I see a net worth statement full of different investments, the ideas just flow for me. Let us all learn from your unique experiences. You will also be writing about things you know and own, so it should come easier.

    Just a thought for you to ponder (it’s the teacher in me). Have a nice day. Gotta grade some homework now! Tom
    Tom @Dividends Diversify recently posted…O My! Now I’m a Real Estate Guy.My Profile

    1. Thanks so much for the suggestions, Tom!

      Those are all very good topics and I do plan on writing them as I document my journey. It will only take some time as I slowly release one post per week. I sometimes have a lot in my mind, but there are days where it’s just blank.

      Goodness, I was supposed to hit publish for my new post last night but I felt something was missing, so I decided not to yet. I actually stayed up last night reading my draft over and over again, thinking there’s something wrong with it… *pulling my hair* LOL

    1. Hi Michael,

      That’s awesome that you killed the loans and started saving for retirement! Once we see the numbers grow, it just makes us want to find ways to make money work for us (as much as we can)!

      Gotta love compound interest when it’s in your favour!!❤️

      Thanks for droppping by! 😊

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