Finance Tip Friday #21: Compound Interest

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“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

This is a famous quote from Albert Einstein when he was talking about the magic of compounding interest in terms of money. Let’s break it down:

“He who understands it”: For those astute nurse practitioner entrepreneurs and investors, if you understand how compound interest works, then you will reap the benefits! You will invest and reinvest your money over multiple years and see the interest COMPOUND and in return, see your investment net worth skyrocket!

“He who doesn’t”: For the average person that doesn’t understand compound interest, then you will typically PAY the interest, rather than earn it! This is paying stupid interest on stupid debt like credit card debt. You don’t earn the interest; you are paying it and enriching others vs. yourself. Similar to working for others vs. starting your own practice.

It is CRITICALLY important you understand the concept of compound interest if you want to understand how to use your money as a TOOL vs. just something you spend. It is also important when creating your plan for financial independence.

Compound interest is the interest that grows on both the money you’ve contributed (the principal) and any previous accumulated interest.

If you were to save $1,000 a month for 30 years you would have saved $360,000. This is a lot of money. But you would be a fool to just have that sit in your bank account earning nothing, especially in the face of widespread inflation like we are seeing now.

If you would have invested that $1,000 a month into a brokerage account that was earning a 10% average rate of return, then that $360,000 you invested would have grown to $1,973,928 over 30 years thanks to the magic of compound interest! This is totally realistic with a moderate risk stock/bond portfolio.

It takes a few years to see the effects of compound interest, but when you do, it truly is an awesome feeling.

The takeaway message here is this: investing your money into an asset class that has a reasonable rate of return of 4-8% will COMPOUND on itself over 10 years. This is how you have your money WORK FOR YOU, and it will accelerate your journey to financial independence as a nurse practitioner. So, begin putting money into a brokerage account ASAP and watch it grow thanks to compound interest!

2 Responses

  1. How do you get the compounding interest from this account, do you use charles swab, etc. What do you recommend?

    1. Compound interest occurs when you continue to invest money into the brokerage account and you reinvest the returns/dividends back into the account.

      I just use TD Ameritrade

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