Compound Interest Really is the Best Thing Since Sliced Bread

Gather 'round  y'all, this is gonna be exciting.

I mean, insofar as math can ever be exciting. 

So here goes . . . I'm gonna introduce you to my favorite financial discovery EVER:
Compound Interest!!

Ta Da!!!:

Math is better in pretty colors.

Please excuse me while I dance a little jig, jump up and down, and show this off like I'm a model on The Price is Right.

Ok. Thanks.

Now that I've gotten that out of my system, I'll fess up that it's not really the math part that excites me.  What's really changed my life is the part about how this magical little math nugget can help me grow my money with oh so little effort.   

And it can change your life too.

Here's how it works:  Compound interest is interest paid on the original principal and on the accumulated past interest. 

It's a rare gift from The Man that helps you make the most of (1) the amount of money you invest, (2) the rate of return you get, and (3) how much time you have to let your money grow.  

The best part is that it works no matter how much or little you have to invest - this isn't one of those perks that's only for the 1%-ers or for people who look great even in bad lighting.

Also, with a couple tweaks, you can have some amount of control over how the whole thing turns out.  And I know how you love control, all you Type A's out there. 

So let's take this baby for a spin, shall we?

Scenario 1:  Let's say you decide to invest this year's tax return/annual bonus/security deposit/birthday money ($1,500 or so), and never touch it again.  Here are some options for how your cash will operate long term in different investments using compound interest:

Interest rates on savings and money market accounts are pretty low right now; these are averages of what I've seen advertised recently.

See that $15,000 in the lower right corner? That's what your $1,500 can do for you even if you totally forget it's there.  Not too shabby. 

I get it if you can't get too worked up over $15,000 - especially $15,000 30 years from now. I admit I'm a bit underwhelmed myself, what with the student loans and all being several times that.

So I'm happy to tell you that it gets even better if you commit to put in $1,500 next year also, and $1,500 EVERY year after that (just $125 a month).  

Behold Scenario 2:

The number in that bottom right corner is looking pretty good right about now.

Here it is again, if pictures are more your thing:

Compound interest - graphically speaking

Check out that action:  $185,000!  And over 30 years you've only put in $45,000 of your own cash. The other $140,000 is the jackpot you get by having a little foresight and a little more discipline.

If you invest even more each year, the graph - and your net worth - will go even higher. 

I love this, obviously.

Compound interest is without a doubt the phenomenon that kicked off my interest in actively managing my own money.  Well, that and not wanting to spend the next 60 years eating beans and doing more working than living while my cash is at the mercy of someone else. 

And while there are decisions to be made about each of the variables you plug into the equation - the amount you invest, the rate of return, and the time you have until you need the money - that's what we're here to learn about together. 

In the meantime, go ahead, Google "Compound Interest Calculator" and play with some numbers to see just how rich you'd like to be.  Then meet me back here and we'll get started.