Right from the start, let’s talk about the power of compounding interest and how you can incorporate it within your personal finances.
Secondly, you’re going to find out answers to these questions:
- What are the criteria that determine the power of compounding?
- Also, what are the three most important recommendations on how to get most of it?
- And the best last part will be a one penny strategy question.
So stick with me to the end…
Today’s topic belongs to the wealth stage called Control Personal Finances.
To clarify the action of the Pat VC leadership, I talk and write about topics related to the 7 Wealth Stages.
You may ask, why 7 stages?
The answer is very simple:
And while living abroad for almost ten years, working for digital agencies and a financial institution, I discovered the pattern of life stages.
Specifically and logically, seven of them have become the major growth formula.
Therefore, the term 7 Wealth Stages of life.
There was a time when I realized I don’t have practical money skills on how to control finances and how money works. So I had to learn it from the ground.
And eventually, it’s been formulated like one of the wealth stages called Control Personal Finances.
That being said,
Controlling personal finances is not a mystery because it’s learnable.
But together with the power of compounding interest, it may have a big impact on your financial future and literacy.
Introduction To The Power Of Compounding Interest
To transition smoothly into this topic, it’s important to mention again that the first step to accumulating wealth is definitely developing a PYF or Pay Yourself First habit.
If you prefer watching, here is a video.
And in the same way,
it leads me to the fact that while accumulating cash using your elite-income skills, then your challenge should be to find an investment vehicle to generate passive income.
Even though, always remember, investing means after you’ve developed an emergency fund and established a PYF habit.
Broadly speaking, one of the best options is to find reliable higher returning asset classes and let it grow with the power of compounding interest.
Therefore, I wrote this article and created a video.
But before we get started, now is the Doer time to take action to doerly pat the Subscribe button on Youtube with the bell icon to get notified.
Because every week you will receive one proven strategy within the seven wealth stages of life.
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With this in mind, let’s talk about the power of compounding interest with one penny strategy.
What Is Compounding Interest?
To begin with, in 11 Basic Personal Finance Terms article I touched slightly on what is simple and compound interest.
But let’s broaden this topic today.
As I have noted a few questions at the beginning of this video, let’s dive deeper into them and understand the eighth wonder of the world, which is compounding interest.
In the first place, what is compounding interest?
In fact, Albert Einstein said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it… and he who doesn’t… pays it.”
To clarify this truth,
I have heard most of the time, and you may have heard the same thing, that thinking about interest is only about loans and debts.
While it may be true, it only gives bad belief in poor and middle-class mindset.
Because society programmed you to believe it…
On the other hand, interest can work superficially well in your favor.
For now, let’s put it into practice with the simple following example.
Let’s say, you have $1,000 sitting on 10% annual interest.
By the end of the year, your balance will be $1,100.
After that, in the second year, you earn a 10% annual interest on your end balance of $1,100.
So you end up with $1,210.
Now, look at the power of compounding interest over 30 years with the same numbers and logic as described previously.
Your total compound interest will end up with $16,449.40.
Then again, you earn “interest on your interest” which causes a snowball effect.
Isn’t it fascinating?
But to reap all benefits, you must understand fundamental criteria that determine the power of compounding interest.
3 Fundamental Criteria That Determine The Power Of Compounding Interest
The first criteria is…
In our previous example, it is 10% annually.
In other words, the amount you earn on your investment within one year.
The second criteria is…
I believe you’ve already sensed from the pictures earlier that the longer you keep your initial balance with the power of compound interest, the larger your wealth will be.
Remember: Time plays an enormous role in this strategy.
That is to say, if you have invested $10,000 over 10 years with a 10% annual compound interest rate, your final investment value will be $25,937.42.
But if you stretch it over 30 years, you will end up with $174,494.02.
It is a significant difference, isn’t it?
In the third place, not only Compound Interest Rate and Time Duration but also your…
Tax Rate determines the power of compounding interest.
Of course, you will always end up with more money when you pay little taxes or don’t have to pay taxes at all.
As a matter of these three criteria, I encourage you to open the compound interest calculator, plug the numbers, study it, and take action.
all the above-mentioned criteria vary significantly and it depends on what type of investments you choose.
It could be:
- High-Interest Saving Accounts,
- Treasury securities,
- Rental properties,
- or even some cryptocurrencies with compound interest…
Time To Take Massive Action With One Penny Strategy
To conclude this article,
compound interest might be daunting…
For this reason, I want you to always keep in your mind following 3 Must-Have rules to get maximum out of the power of compounding interest.
- In the first place, scrutinize 7 critical steps before you invest. After that, commit as soon as possible to invest even a small amount of money in order to start accumulating wealth.
- Second, build self-discipline. That means always pay yourself first and contribute to your nest egg bucket whenever a penny comes into your pocket.
- Lastly, you must be patient and commit to your financial goals. It’s not about getting rich quick. And do not fall into the trap of money myths. Remember, the power of compounding is the eighth wonder of the world.
Now, if you should remember just one thing from this video, get this:
Do you agree?
Because the sooner you commit, the greater your positioning will be.
And finally, here is a big Why you must take action now with this “one penny” question strategy
If I gave you two options for the next 30 days, which one would you choose? 1. Either $1,000,000 in cash; 2. Or a single penny that doubles in value each day.
What would be your answer?
Ponder on it…
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Thanks for reading or watching and I will see you next week.