There is a simple secret to getting rich slowly. It’s called compound interest – the mathematical force in the financial universe that Einstein once described as ‘mankind’s greatest invention.’ But it doesn’t work if you don’t know how to use it.”
E L Emerson
That’s how I like my investing.
Nice and boring.
Predictable returns that grow in the sunshine of compound interest multiples, turning slender financial saplings into retirement Redwoods.
Don’t talk to me about Las Vegas-style day trading, shorting the market at exactly the right time or candlestick charts. It’s simply not a game I want to play.
I want my compound interest. And so do you.
Here’s how it works.
Let’s imagine that you have decided to invest £1,000 and you have the ability to get a 7% annual rate of return -that’s £70 at the end of each year.
Why did I choose 7%? Well, that percentage is convenient.
By example, for the period 1950 to 2009, if you adjust the S&P 500 index for inflation and account for dividends, the average annual return comes out to exactly 7.0%.
You can check that here.
And by the way, you should always double check what you’re being told, particularly when it comes to money.
Now, just to put that 7% into perspective, right now (July 2017) the banks will give you about 1% on your deposit account.
That’s awful. Applying compound interest to a shitty interest rate will give you a shit return.
If you’re getting 1% on your money right now, it will take you 72 years to double your money. And even Noah couldn’t wait that long.
So, back to the original example, what happens to your money – that £1,000 – over time.
Well, here’s a calculator to show you – compound interest calculator.
As I said earlier, check it our for yourself.
But I can save you some time here:
- £1,000 at 7% over 5 years = £1,417.63
- £1,000 at 7% over 10 years = £2,009.6
- £1,000 at 7% over 25 years = £5,725.42
Now try this.
Start with £10,000, and put £100 into the monthly deposit box. Do you think £100 per month is impossible or unlikely? How much is your car payment, SKY TV or even your Starbucks (or other) monthly?
- £10,000 at 7% over 5 years = £21,377.31
- £10,000 at 7% over 10 years = £37,506.06
- £10,000 at 7% over 25 years = £138,733.89
And if you push that boat out to 40 years – the average working lifetime – you find yourself with £427,126.60.
Now try this. If you start with just £1,000 and manage to add £500 per month at a 7% interest rate, after 25 years you end up with £464,652.00.
Play around with the numbers.
This is how people on an average salary get rich.
And leave the candlesticks to the folks seeking excitement in all the wrong places.
E L Emerson, Editor, HNW MagazineFollow HNW here - For the life you want to lead...