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Written by Vishnu Juvadi
The best money lesson I have ever learned is the power of compound interest. Most of the world underestimates the power of compound interest and usually don’t understand it. In simple terms, your money grows exponentially instead of linearly.
How does it work? Well let’s say you put just $100 in towards your retirement every month (not much right), after 50 years that $100 every month will turn into more than a million dollars. You’re probably thinking, “No you’re crazy, there is no way!” Well let me explain, the stock market has about a 10% return over the long term (think 30 years or more). If you have $100, that is $1,200 every year which is compounded by 10%. Try it yourself if you don’t believe me here.
People for centuries have known about the power of compound interest but it is still not widely used. In fact, more than 69 percent of Americans don’t even understand it so if you’re reading this, you’re already ahead of those 69 percent. The younger you understand the power of compounding the better, because you can use it at an early age and develop a modest investment portfolio which will help you later on in life.
$100 a month may be hard to fork up if you want to splurge on something or if you’re tight on money that month. But what if you didn’t have to think about it? Having an automatic deposit into your account will allow your money to grow and you don’t even have to actively think about it. You won’t even know that $100 got added to your account!
Yeah, saving is good but it is not nearly as powerful as investing. If you keep your money in a traditional savings account you may earn around $1 for every $1000. However, if you invest, you may earn $100 for every $1000 you invest in the market (over the long term). Investing scares people off because they believe they will lose money, but the market has always stayed positive over the long term. Many people lose money when investing because they’re not disciplined, so since you now know that the market always corrects itself, go out and start investing!