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The True Value of Compound Interest
A lot of people do not recognize how easy it actually is to retire with a million dollars. That's not an opinion. That is a fact that I will be backing up with math in this article. A lot of people believe that it takes a lot of money to turn into one million dollars, and it does to some extent, but it doesn't take nearly as much as I believe most people think it does.
Let's say, for example, that someone places $200 a month into the stock market. That is $2,400 a year. If the market continues to do what it has historically done, one will receive a 10% return a year on average. So, on a $2,400 investment, one should receive around $240 if they invested into a fund that tracks the market. Obviously, that is not a large sum of money, but now you have $2,640 plus another $2,400 that should increase by around 10% the next year which is a profit of $504 which is added to the $5,040 that was invested which leads to $5,544 plus another $2,400 being invested that year which should lead to a profit of $794.40. When one does that math for 40 years of investing $200 every month, that should lead them to $1,168,444.35. This means that if one can invest $200 every month into a fund that tracks the total market and the market itself can receive a 10% average annual return, one will be a millionaire after 40 years. So, if one starts doing this at 20, they should have over a million dollars by 60 if the returns average 10% a year.
That is the power of compound interest. As the gains increase, the amount of money compounding also increases creating more gains. The money one makes is compounded overtime. Obviously, it is not certain that the market will continue to increase by a factor of 10% a year on average, and one does have to deal with some level of risk, but I believe that the market will continue to grow over a long period of time, and its a bet that I am willing to make.
I also recognize that not everyone can afford to invest $200 a month. I once met someone who told me that they couldn't invest more than 5 bucks a month, but even $5 a month invested into a total market fund that compounds by 10% a year on average for 40 years leads to slightly above $29,000. Even an extremely small amount of money can compound overtime.
I believe that this shows the advantage of the get rich slow approach. By having patience, one can take advantage of compound interest and build their wealth over a long period of time. My hope is that people reading this will now understand why compound interest has been described as the 8th wonder of the world.
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