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Why compound interest suck initially - Four Pillar Freedom

Why compound interest suck initially - Four Pillar Freedom

TLDR: Most of compound interest returns appear later, makes for a difficult initial years of investing

Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

Albert Einstein

Compound interest is magical, but to really see the benefit of compound interest, you need to wait. You save a small portion say 10% of an assumed income of 100,000 every year and it yields 7% returns, then at the end of the year, your net worth has reached 10,700$. Out of your total net worth 93% comes from your savings and 7% from your investments. For this to reach parity it takes 11 years of investing at 7% assumed returns.

So you can imagine the difficulty in staying focused and sticking to your guns to see real returns. Only the patient investor with a long term view see the real benefit of compounding. Irrespective of the amount invested each month, assuming the same return, the percentages work the same way.

Keep investing and stay the course as the exponential benefit of compounding really happens at the later half of the investing schedule.

Four pillar freedom, has this and other simple to follow and insightful posts on personal finance, definitely worth a follow.

Financial planning 101 - Step 3 - Automation

Financial planning 101 - Step 3 - Automation