Compound Interest

Reading my weekly Stansberry investment newsletter I came across an article that I thought I would share.  This article is about compound interest and its importance.  Most people don’t realize how important compound interest can be; over time, money grows and as it grows and grows, eventually the growth becomes quite explosive.  Eventually, the money works for itself and grows exponentially.  Below, you’ll see a chart that gives an example of how compounding works.  But to give you another idea, lets talk about sheep:

Pretend that you are a shepard from the days of the bible.  You live in a tent with your wife and son and daughter and you have a flock of 8 sheep, 4 male and 4 female.  In the spring, your 4 female goats give birth and after the first year you now have 12 sheep.  The following year, your 6 female sheep give birth and you now have 18 sheep.  In the third year, the 9 female sheep have a baby sheep each and now you have 27 sheep.  4th year you have 13 more sheep and in year 5 20 baby sheep are born.  After 5 years, your 8 sheep have turned into 60.  Interest compounds a little slower than this but over time, as the money grows, you are compounding a larger and larger amount so that the amount of interest you receive each month becomes a substantial amount.

Imagine, some 20 or 30 years later, you have 1,000 sheep and in the spring, you have 500 new baby sheep.  Compound interest works like this.  Eventually, your “nest egg” is big enough so that the interest generated is more than your regular salary.  I am just totaling my dividends, interest and options premiums for December and my million dollar portfolio generated over $10,000 this month (combined interest, dividends and options premiums).  In the 3 months previous, my account has paid me  $6,456, $9,435 & $3,479.  I can remember back when my account had thirty or forty thousand dollars and my monthly dividends and interest might only be ten or twenty bucks.  One sheep born… years later, 500 sheep born.

From Stansberry:

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions – he’s finished.

A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.

This is a study that I suggest you show to your kids. It’s a study I’ve lived by, and I can tell you, “It works.”

So you can see that the investor who stared earlier ended nearly the same even though he invested much less money.  Over time, compounding can have a dramatic effect on your investments.  Previously we talked about the Rule of 72.  If you can get a high rate of return on your investments and let that interest compound over time you can save a million dollars.

Eventually, the interest earned on your investments is more than your regular monthly contributions.  When that happens, it is a great feeling!

Save, invest and grow your wealth until you are a millionaire.

Good luck!

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Make a Goal

One of the most important steps – and perhaps the most overlooked step to wealth building is the setting of specific goals.  I once read an article – it has been years so don’t quote me on specifics.  The article quoted a study of college students, graduates and working professionals.  It asked if the study subjects wrote down their goals.  Most people had goals but this study was looking at the difference between those who wrote their goals and those who just had them in their heads.

The results of the study were interesting; if I remember correctly, 80% of the people who wrote their goals were successful in attaining them whereas only 20% of those who did not write their goals were successful in attaining them.  This observation echoes the same findings that Napoleon Hill had in his book “Think and Grow Rich.”

It is very important to write down your goals.

In November 2004, after I had read Napoleon Hill again (I had read it twice back in my college days), I sat down and wrote out my goal.  It was an ambitious plan and I did not know if I would accomplish it or not but I wrote it down.  I’ll have to admit, I didn’t read it twice aloud daily like I was supposed to.  Perhaps I read it a few days a week and sometimes I would forget for a week or two.  But I would always come back to it, visualize it, fantasize about it and try – as hard as I could – to will it to happen.

It read:

11/15/04

I, Samuel, will have in the bank, $1,000,000 – one million dollars, cash, by 30 November 2012.  For this amount of money, I will give my time, effort, energy, liberty, ego, family, relationships, friendships, freedom, hard work, travel, recreation and hobbies; I will use all of my determination, nuance, skill or anything else necessary to make this goal a reality.

I can already see myself in possession of this money.  As I close my eyes, I can already see this amount of money in the bank.  It is as sure as there.  I will attain this goal.  I will focus on this goal and all of my actions will drive me towards this end; I will conduct myself in a way that is compatible with the successful attainment of this goal.  I will forgo and ignore all distractions that take my attention and efforts off of this goal.

I will read this statement, aloud, twice daily, morning and evening, until this goal is a reality.

I surpassed the $1,000,000 cash mark on 5 August 2012, about 3 months before my goal date.  There were many months (years) where I thought I wouldn’t make it.  Especially after the 2008 stock market crash.  I lost over $100,000 in one month.  Many of my work colleagues freaked out and abandoned the market and put their money in FDIC insured accounts.  I re-read my goal and thought about it and realized that this was a once in a lifetime opportunity.

I piled what cash I had left into the Dow Pro-Shares Ultra fund (leverages the Dow Jones Industrial average 200% – if the Dow is up 10%, you’re up 20%, if it is down 10%, you’re down 20%).  Then, I took out a margin loan with my broker and plunked down some more in this fund and some other blue chip stocks.  For the entire year 2009, I put every last paycheck I had into good stocks that I thought were severely undervalued.

I received an application for a Discover Card & it invited me to “transfer balances” interest free for 6 months.  I thought, “Why not,” and put down my brokerage as a creditor – I did have a margin loan after all.  Sure enough, Discover mailed them a $20,000 check.  This freed up $20k in margin allowing me to buy more stock.  I then called up my Visa card and asked if they would send me “some of those balance transfer” checks.  They were happy to oblige.  My account climbed about $400k from Fall 2009 til Spring 2010.

During the French Revolution, one of the frogs said, “Buy when there is blood in the streets.”  How true that is.  If you want to be rich you have to be bold when others are scared.  You have to think outside the box.  You have to seek the advice of wise people (I pay more in financial newsletter subscriptions than I ever paid for any membership or subscription and it has paid off 100 fold).

Back to goals.  Have you written your goals down yet?  If not, 80% chance you won’t make your goal; you probably will not become a millionaire.  Better to write your goals and be in the 80% club!

Good luck!

The use of copyrighted material in this website is protected by the Fair Use Clause of the U.S. Copyright Act of 1976, which allows for the sharing of copyrighted materials for the purposes of commentary, criticism and education.  All shared material will be attributed to its owner and a link provided when available.  All other comment on this site may be reproduced with the author’s consent.  Please source any references or quotes of this website to: http://www.my1stmillion.net