What Is Compound Interest

Compound Interest is going to make you wealthy!

In this blog, I want to make sure you understand the urgency of starting to invest as soon as possible. Why? Because there is a magical concept named Compound interest that can help you get very wealthy, but, it works over time. The sooner you start, the wealthier you get. I dedicated an entire episode (Episode 2: The Secret to Investing is Compound Interest) on this subject because I do firmly believe everyone should be educated on how to leverage compound interest to its maximum. But before diving deep into this topic, let me give you a tip when saving: You should agree on a percentage that would be kept as a saving from your monthly income [2]. It could be between 30% to 50%. Hence, when you receive your monthly salary, calculate the percentage you want to save and put it in a deposit. In this way, you are actually making sure that you achieve your financial plan in terms of savings. It could be really difficult to manage in the beginning as you would end up wondering what you’re supposed to do the rest of the month to support yourself financially but you’ll eventually find a way out [3]. It is the perfect trick to make sure that you’re saving and paying yourself first.

What does the traditional FIRE community teaches?

To be very honest, the traditional FIRE community actually teaches you to be frugal. That is why the saving percentage between 30 and 50 is good to go. Although they tried to save 80% of the monthly income but to me, that is totally crazy. It might sound crazy to you as well. You can do whatever you want with your money. If you want, you can be frugal and live under a bridge without paying any rent [4]. That is totally up to you.

What is my FIRE view?

For me, I believe that the FIRE community must enjoy life too. That’s the whole point of earning money and doing the job. Besides career growth, having money is a part of life enjoyment because you need money to do the stuff that makes you feel alive and happy. Therefore, it is my recommendation to save less than 80%, what the advisors of the traditional FIRE community say and enjoy life as well. The traditional form of FIRE focuses mainly on the savings along a period of your life so that you would be able to pay for the rest of your life. How we’re going to that is we’re going to use our savings to invest smartly in a way that leads to capital growth and finally a passive income resource to achieve financial freedom. It makes way to the next gen personal finance.

The secret is in the compound interest!

Today, in this blog, I will be explaining the term ‘Compound Interest’. Compound Interest is actually a secret to achieve FIRE [5]. Moreover, I will be discussing mutual funds which is the easiest way to start investing [6].

A few days ago, I was talking to a friend of mine and she told me she is skeptical about pensions and she’s worried about receiving retiring money later in life. This made me realize that our generation has no surety that the hard work we’re doing in the present will be rewarded in the future or not and this is what is actually worrying people. But since you’re on this blog, that means you’re on the right track.

A couple of years ago, I was young and not that much smart. You can imagine me googling ‘Can you get rich off compound interest?’ [7] That is how I found out that compound interest is the best way to put our money to work overtime. That is when I connected the dots in my head and I really loved it because it showed that I’m finally learning. I realized that FIRE is our destination, compound interest is the road to FIRE, and money is the vehicle. Unfortunately, compound interest works with time. I’m saying unfortunately because time is the only element that can’t be bought.

What is Compound Interest?

We can upgrade our vehicles, we can keep growing money, we can go for interest on interest. For example, I have 1000 euros and I decided to invest them in a certain product that gives me 10% of interest every year. In one year, if everything goes well, I’ll have 1000 euros plus a 10% on those 1000 euros which equals 1100 euros. The second-year I’ll have 1100 euros plus the 10% which equals 1200 euros, 10% euros interest on interest. Therefore, I would be actually earning interest on the previous year’s interest. Thus, this is called compound interest [8].

If you’re a non-mathematicians person, let’s make it easy for you to understand. It’s just like you keep your money in a particular product and with the passing years, the number grows. It also made me understand that why individuals with a big stash of cash have it easier because 10% of a million euros is of course not the same as 10% of 1000 euros.

 

Compound Interest and Young People

Compound interest works with time. We cannot cheat time, so start now. Reference: Business Insider.

Why should you start now with compound interest?

You should start now because if you’ll begin now you’ll have more years to compound the interest. You can actually apply this technique to a lot of products. The whole concept of FIRE is a bit tricky. The more money you’ll have earlier in life, the easier it will get for you to have more.

The problem lies here for those who, unfortunately, do not have a big stash of cash. They would need to work with more effort and with more brain & power to achieve FIRE.  Remember, in my blogs you’ll find all the tips, tricks, and glitches in the system so that you’ll be able to leverage this compound system to the maximum. Thus, don’t worry if you have a small stash of cash! It’s okay for me too. As I said earlier that this compound interest theme can be applied to nearly all investment strategies that could involve different financial products.

Mutual Funds – compound interest for busy bees

One of the easiest investment strategies is through mutual funds. Especially those readers who do not have much experience in investment can put their money in a mutual fund which is usually fully managed for you. Now you must be wondering where you can find these mutual funds? Well, mutual funds are normally offered by traditional banks so you can find them there and happy investment!

My first Mutual Fund investment

Three years ago, I went to see my family in Spain. There was a financial advisor who was actually my dad’s advisor but I somehow inherited it and he was also my financial advisor. I told him that I want the bank to grow my money and he said, ‘Okay, no problem. We have indeed a couple of financial investment products that you could benefit from.’

At that time of my life, I was not much interested in finances so I asked him for the one that would require me to invest the least time and he recommended me ‘Mutual funds’. Actually, he used some fancy words like he said we have algorithm-driven smart wallets which will be perfect for young girls like you. I agreed on it and he presented a portfolio with graphs and charts. Three years ago it was 2018 and he was telling me about the previous year, which means in 2017 that they produced an 8% increase in clients capital and he showed me different graphs. He further added that it was a bit of average. It could be more or less but that could be taken as an average.

If you guys remember maybe that 2018 was not a great year for the economy and finance [9]. I don’t really know what happened that year but it just wasn’t great. Therefore, as a result, my smart wallet investment went 2% – 3& down to a negative, and I was feeling scammed. That was the first time I experienced how does it feel to lose the value of your investment and how powerless I felt.

That was the moment when I thought I can do better and 2-3 years later, I did better. Although I increased the risk of my investments but I did a whole lot of self-study. A mutual fund is a product that you can invest in which will be fully managed for you.

Conclusively, mutual funds work and they’re extremely easy to manage. Among certain products, choose the one that adheres to your risk appetite the best. If you prefer that a bank manages your money for you, you can just ask for a mutual fund from your bank. It’s a safe and steady way but the bank will charge you for the service so make sure to ask for the price of service as well.

Reason for Saving and Investing

The main reason for me saving and investing my money is tee fire which is 100% of my heart. Moreover, I invest and plan for big purchases like buying a house or going on a cool vacation trip. Find out a reason for your saving and investing your money. It will help you stay motivated towards your journey.

Conclusion

In this blog, we discussed financial education services, how we can save money for next gen personal finance and how we can invest that money. In Episode 3: ‘Lost in Wall Street’, we’ll be learning about financial markets.

When we invest money, what banks do is that they put it in the financial markets, and most of it in the stock market. Therefore, in the next episode, we’ll look forward to understanding these financial and stock markets. In addition to this, we’ll be approaching financial markets from the perspective of financial risks. We’ll be finding answers to what is the risk? What can you lose? Did you lose your money or part of your money? And many more questions like these will be answered. Hence, I will be elaborating on the term ‘risk’.

Furthermore, have you heard of high risk, high reward? I’ll be trying to build into different investment strategies according to the risks in the next blog. I will also be presenting financial or investment products like stocks, bonds, durables, options, etc.

If you’ve read till the end of this blog, then you’re probably interested in reaching FIRE and I’ll guide you through this journey in the best possible way I can.

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