In life, it’s easy to fall into an “I’ll do it tomorrow” mindset.
And when the “tomorrows” add up like compound interest, years can fly by in the blink of an eye. Before you know it, you’ve given up more days than you can count!
While there can be several hurdles for doctors to overcome when creating a long-term investment plan, perhaps the most poignant is time. Do you know what it really “costs” you to wait?
Your time is valuable, so let’s start using your time and money in more productive ways so your money can start working for you—even on your days off. We believe that’s the magic of compound interest.
Compound Interest Doesn’t Wait
Compound interest isn’t sitting on the sidelines idle. We look at is as working whether you’re taking advantage of it or not.
So, what is compound interest anyway?
Compound interest is essentially interest on top of interest. It’s two-fold: it’s the interest you earn on the principal amount and the interest you keep accumulating.
In short, compound interest makes your money grow exponentially faster.
Compound interest is similar to a snowball rolling down a hill. As the snowball plunges to the bottom of the hill, it will accumulate more snow and grow in size. For compound interest, the sooner you start saving, the bigger your snowball will grow as the years go on.
In terms of an account that pays compound interest, the interest payments are added to the principal at the end of each compounding period—daily, monthly, or semi-annually. Take a high-yield savings account as an example:
- Say you have $20k in a high-yield saving account as your emergency fund. You are making no additional contributions, and the account pays a 2% interest that compounds monthly.
- You’ll add about $2100 to the principal over 5 years just from compound interest. And you didn’t even have to lift a finger!
Why Compound Interest Is So Valuable When Investing
The concept of compound interest isn’t just helpful for savings accounts; it’s also may be instrumental in investing.
When you invest in the stock market, you aren’t guaranteed a return the same way you might be with a bank or savings account. Instead, you get a “return” when your investments go up.
By keeping those investments and also their subsequent returns invested, you create the potential for even more significant returns.
Your 401k is an excellent example of an investment account that compounds over time. Depending on the assets within your 401k, the interest earnings could compound monthly, quarterly, or annually. If you reinvest your interest earnings and make regular deposits, your balance will grow even faster.
Let’s take a closer look at the compounding potential of your 401k with a concrete example:
- Say you plan to contribute 10% of your $150,000 salary (not accounting for bonuses). Your current 401k balance is $11,000, and the annual rate of return is 7%.
- If you’re 30 years old and want to retire at 60, you’ll contribute about $450,000 to your 401k.
- If your employer matches 50% of employee contributions up to 6% of your salary, total employer contributions would be about $135,000.
- After 30 years, the total in your 401k is about $1,994,840, and that’s made possible by compound interest!
The moral of the story is to start investing early. Waiting just 5 years to invest can significantly impact your potential investment performance. What if investing more today meant retiring 5 years early? You’d probably jump at the chance!
Compounding returns on your investments may create a significant bounty long-term—like 30-40 years in the future. That’s one reason why creating solid savings and investment habits early is so beneficial.
Applying The “Compounding” Theory To Your Life
At Vestia, we view “returns” as two-fold: return on your investments and your life. And that’s why our mission is to help you create wealth that matters.
It’s unlikely that you’re building wealth just for the sake of it. You’re building wealth to achieve financial freedom, live out your dream retirement, take care of your parents, put children through college, and to be able to accomplish all of your big goals.
A smart financial and investment plan that takes advantage of opportunities like compound interest can help you accomplish these things. Compound interest can further support your life, values, goals, and dreams.
Creating wealth that matters also requires you to shift your mindset into one of abundance. An abundance mindset empowers and allows you to make more intentional experiences in work, relationships, volunteering, and hobbies that result in positive ROI.
The combination of an abundance mindset and the theory of compounding are key to achieving the wealth that matters. What brings it home is an advisor who understands your goals and values and can create a plan to help you live a meaningful life. If you’re interested in learning more about our unique approach, contact our team today.
Investment advisory services offered through Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, and Vestia Advisors, LLC. Securities offered through Ausdal Financial Partners, Inc., 5187 Utica Ridge Rd, Davenport, IA. 52807 (563)326-2064. Member FINRA/SIPC. Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, Vestia Advisors, LLC, and Ausdal Financial Partners, Inc. are independently owned and operated.
This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third-party sources and is believed to be reliable. All investing involves risk, including the loss of principal.