Get RICH by the power of compounding INVESTMENT

Albert Einstein a german-born theoretical physicist said compound interest is the eighth wonder of the world he who understands it earns it he who doesn't pays it compound interest accelerates the growth of your savings and Investments over time watch this video till the end and you could be taking the first step towards becoming a millionaire meet best friends John Priya Raj n Kelly they have been friends for 10 years and have now graduated from the same University they all found good jobs in their respective fields of study to celebrate the occasion they all decide to meet up at John's house for beer they picked John's house for a meet-up as they wanted to get financial advice from John's Uncle Randy on saving money for the future by investing Randy was working as a Financial Consultant for a Fortune 100 company here is how Randy explains the investing benefits of compound interest [Music] before diving deep into the power of compound interest on investing Randy explains few Financial terminologies as follows principal the principle the initial amount which posit as part of investing or saving for example if you deposit five thousand dollars of your savings as an initial deposit then your principal is five thousand dollars when you invest your aim should be to not lose the principal amount deposit or withdrawal this is the dollar amount which you plan to make a contribution or withdraw from your investment if you contribute 100 monthly then your contribution is one hundred dollars inflation is the rate at which the value of money decreases with time for example five dollar might now get you a good breakfast with coffee and toast but five years from now five dollar might get you only coffee and no toast this is because the price of coffee has increased but not the value of five dollars so it is very important to increase your income to keep up with prices in other words to fight inflation always put your money where it can grow at the rate of inflation which is Possible only by investing [Music] interest income it is the money gained on top of your principal amount if your principal or initial deposit is five thousand dollars an annual rate of interest is set at five percent then the interest income at the end of the year is two hundred and fifty dollars which is five thousand dollars multiplied with five percent compound interest is when you earn interest on both the principal and the interest income the two hundred and fifty dollars earned as interest income can be added back to principal amount of five thousand dollar making the new principal as five thousand two hundred and fifty dollars so with rate of interest of five percent the new interest income second year will be two hundred and sixty two dollars and sixty cents don't worry if this is too confusing in subsequent slides we will discuss compound interest in detail with realistic scenarios [Music] ten thousand dollars of savings which you would like to use as principal amount for making more money you now have two options option one is to deposit in bank and expect an annual rate of return of 0.01 percent or option two is to invest ten thousand dollars towards stocks or real estate the historical average rate of return on stocks over 20 years is 10 percent but it's a no-brainer to choose investing as you get a higher interest rate of return and interest income since your goal is to make money to fight inflation you need to look for an option that has a better rate of return so let's dig more into option two to learn the power of compound interest in between if you want to learn more on the benefit of real estate investment then check out my other video titled get rich by investing not savings I will also put a link in description to better make you understand the benefit of compound interest on investing let's consider four scenarios Raj choose to play a cautious game and decides to keep his money in the bank which will give him a maximum 0.01 yearly interest income unfortunately this is what majority people do fearing taking the risk John starts investing with a principal amount of ten thousand dollars but decides not to reinvest the yearly interest income basically his principal amount will be the same every year [Music] Kelly starts investing with ten thousand dollars as principal and five hundred dollars as monthly contribution but she plans to stop monthly contribution after 20 years that is the year 2042. [Music] Priya will hold off investing until 2042. from the year 2042 she plans to start with a principal amount of ten thousand dollars and a monthly contribution of one thousand dollars yes double the amount of Kelly for Simplicity of calculation let's assume they will retire 35 years from now which is 2057 and will invest in stocks which is known to give 10 rate of return over 30 years let's now analyze how the money will grow for the next 35 years in each of the scenarios let's consider scenario one which is for Raj chooses to play a cautious game and decides to keep ten thousand dollars in the bank which will give him a maximum 0.01 yearly interest income so we can conclude the following from this scenario the duration will be 35 years the investment type will be banked since he plans to deposit his money in a bank so the annual rate of return will be 0.01 percent with this information let's put the data in the table at the end of the year 2022 with ten thousand dollars as principal and an interest rate of 0.01 Raj will earn one hundred dollars since he does not plan to reinvest the 100 back into principle for next year his principal for 2023 will remain the same as ten thousand dollars so his interest income for the year 2023 will be 100 again this will continue until the year 2057 as the duration is 35 years which is when he plans to retire at the end of 35 years Raj would have made a profit of three thousand five hundred dollars by depositing ten thousand dollars in the bank in the year 2022 which is not that impressive as it won't help fight inflation [Music] let's consider scenario two which is for John unlike Raj Jon decides to invest in stocks and not keep money in the bank as the rate of annual return is higher compared to the bank which is 10 over the long term this comparison is similar to scenario one but the profit is greater as the money is invested and not kept in the bank so we can conclude the following from this scenario the duration will be 35 years the investment type will be in stocks since he plans to invest in stocks his annual rate of interest will be around 10 percent with this information let's put the data in the table at the end of the year 2022 with ten thousand dollars as principal and an interest rate of 10 percent John will earn one thousand dollars as interest income since he does not plan to reinvest the one thousand dollar back into principle for next year his principal for 2023 will remain the same as ten thousand dollars so his interest income for the year 2023 will be one thousand dollars again this will continue until the year 2057 as the duration is 35 years at the end of 35 years John would have made a profit of 35 000 by investing ten thousand dollars in the year 2022 this scenario proves that investing will yield a better return than saving in a bank however this does not show the power of compound interest as the interest income is not reinvested keep watching you will be surprised what compound interest can do to your money over long term [Music] let's now look at scenario three which is based on compound interest Kelly plans to choose the path of investing in stocks she also plans to make a monthly contribution of five hundred dollars but only for the next 20 years which is 2041 so we can conclude the following from this scenario the duration will be 20 years the investment type will be in stocks since she plans to invest in stocks her annual rate of interest will be around 10 percent her yearly contribution will be six thousand dollars as she plans to contribute 500 every month with this information let's put the data in the table for the year 2022 principal will be sixteen thousand dollars which includes an initial ten thousand dollars and a yearly contribution of six thousand dollars applying a 10 annual rate of return the interest income at the end of 2022 will be one thousand six hundred dollars so the year-end balance will be 17 600 let's now calculate for the year 2023 the principal will be the previous year's balance which is 17 600 plus a new yearly contribution of six thousand dollars which adds up to twenty three thousand six hundred dollars applying a 10 annual rate of return interest income earned will be two thousand three hundred and sixty dollars and year end balance will be twenty five thousand nine hundred and sixty dollars as you see due to interest income carried over to next year's principal the yearly interest income keeps increasing which is great since Kelly plans to make a monthly contribution for the next 20 years let's calculate her balance at the end of the year 2041. the starting balance at the beginning of the year 2041 will be 356 553 dollars I used a website to calculate these numbers I will be providing the link in the description please feel free to play around with different numbers adding the 2041 yearly contribution of six thousand dollars to this balance will provide the new principal for year 2041 which is 362 553 dollars so at the end of the year interest income will be thirty six thousand two hundred and fifty five dollars and the ending balance will be 398 809 dollars so for the year 2042 the starting balance will be 398 809 but there will be no annual contribution so you end interest income is thirty nine thousand eight hundred and eighty dollars and ending balance will be four hundred and thirty eight thousand six hundred and eighty nine dollars using a similar calculation until Kelly's retirement age which is 2057 the total balance at the time of retirement will be 1 665 924. for 35 years the total contribution made by Kelly is one hundred and thirty thousand dollars and profit due to compounded annual interest of 10 is 1535 924 dollars that's indeed a lot of money this is due to making the best use of compound interest and not taking off the interest income every year like Raj and John let's now look at scenario 4 for Priya which is also based on making the most of compound interest [Music] unlike Kelly Priya plans to start investing in stocks from the year 2042 until year 2057 with an initial deposit of ten thousand dollars and a monthly contribution of one thousand dollars which is double the monthly contribution of Kelly so we can conclude the following from this scenario the duration will be 15 years the investment type will be in stocks since she plans to invest in stocks her annual rate of interest will be around 10 percent her yearly contribution will be twelve thousand dollars as she plans to contribute one thousand dollar every month based on these values we can generate this table as you can see by the retirement age of year 2057 Priya will have an ending balance of 461 169 dollars her total contribution will be one hundred and ninety thousand dollars her total profit or interest income will be two hundred and seventy one thousand one one hundred and sixty nine dollars it's interesting to see that although Priya contributed double the monthly contribution when compared to Kelly her ending balance is nowhere close to Kelly's this shows the importance of investing early [Music] let's do a quick comparison of all the four scenarios Raj decided to play it very safe and preferred to put money in a savings account which resulted in a very low retirement income although John decided to invest and not depend on a savings account he did not reinvest the interest income which made him lag behind in retirement savings prayer liked the idea of reinvesting interest income but she didn't start until 2042 so she couldn't catch up with Kelly even though she doubled her monthly contribution Kelly made the best decision with retirement Planning by deciding to invest and not depending on a savings account she started early and also reinvested the interest income to summarize the trick to investing is to get started and you have to start now time needs to be on your side for a good result from investing the thought of am I too old to invest comes to everyone's mind remember KFC was started when the founder was 63 years old because he could not stay on SSN although the best time to start investing is early it is never too late to start better late than never compound interest helps you to build money without lifting a finger true wealth cannot be achieved without the benefit of compound interest although it requires a long-term Outlook compound interest can amplify your wealth trajectory help you prepare for future financial needs and improve your general lifestyle as a wise man once said money makes money and the money that money makes makes money [Music] thanks for watching don't forget to subscribe to the channel come back soon for more productivity videos

Channel: Doodle Knowledge

Views: 24,859

Keywords: Get rich by investment, compound interest, how to get rich, how to make money, how to invest, get rich by investing not by saving !!!, investing, money, how to be a millionaire, investing basics, stocks, financial education, make money, stock market investing, how to become a millionaire during a recession, Doodle knowledge, Inspiration, Motivational, Self help, Self improvement, power of compunding, get rich with power of compunding, secret to financial freedom, rich versus poor

Id: SSxMmLf6YWQ

Length: 17min 17sec (1037 seconds)

Published: Sat Oct 29 2022