Thursday, June 9, 2011

Understanding Compounding Interest & Rule72

Hey bloggers, simple words in that heading but really how many of you keen investors understand the "magic" of compounding?  Not to worry, the K-Man has the goods!!  Basically compounding is interest earned on your Principal (start up money/ plus what you continue to invest) and the interest you've already have earned.....pretty sweet deal. So for an example, you had invested $100.00 and it earned 10% at the end of the year that would be $110.00, simple math. Next year that original investment would be $121.00....the $10.00 interest on your start up of $100.00 + the $10.00 but also $1.00 on the first $10.00 of interest from the year one. So to put some glamor in these numbers lets look what it would take to be a millionaire as that word still sounds sexy when thinking of reaching your financial goals. If starting from age 20 with $150 per month you would be in that exclusive club by age 60, just $5.00 per day ( just think, a coffee lol) wow the power of compounding and time!  Now waiting to start at age 30 you would need to increase your monthly to over $400.00 and at 40yrs old the monthly would be $1300.00, so without saying the earlier you start the better. Another method to calculate your earnings is called the 72 Rule...simply you divide your interest rate of return into 72 to find out approx. how long to double your investment. Example, you have an investment vehicle that pays 8% so divide 8 into 72 and your original investment doubles in 9yrs. To finish up, a wise man once told wont run out of money, but you WILL run out of time!!

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