Principle #1

You must spend time on a compound interest calculator and master the understanding of uninterrupted compounding power.

Let’s say your rich uncle gave you $10,000 at your birth to be invested at 10% interest (the approximate long term average of the S&P 500 index with dividends reinvested). It’s to be left there until you’re 65 years old. Doing so, your nest egg would have grown to $6,475,000.00. Now assume you don’t need that money but you want to leave a healthy inheritance for your kids to be dispersed when you hit the age of 86. They will get to split $52,400,000.00! This is the power of compounding and time. As a side note, this was only with a 1 time contribution of $10,000. 

 On the other side of this coin is how compound interest can work against you if you’re paying off debt. 

Imagine that you’re carrying a $10,000 balance on a credit card (at 4% interest-which is much lower than real world rates). You plan to not place anything else on the card and to pay it off in five years. Even though you’d be chipping away at your balance and paying an extremely low interest rate, you could still end up paying a lot in interest charges-more than $1,000!

And if you were being charged 18% compounded daily – which is closer to the average credit card interest rate – you would pay $5,236 in interest after five years!

Don’t Interrupt your compounding! 

Don’t withdraw money for short term goals like trips or car purchases just because some money has accumulated. 

Don’t withdraw money for emergencies. They most likely will happen at some point. So, plan ahead and save 6-12 months of expenses.

Compounding only works if you allow your investment to grow. The results will seem slow to come at first, but persevere! Most of the magic comes at the very end. So, start early, and invest regularly. Most importantly, don’t interrupt the power of compounding.

“Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.” – Einstein