What Exactly Is Compound Interest?

Compound interest is when you let the interests from an investment reinvest into that particular investment without paying yourself out.

Usually, it is even better if you reinforce your investment recurrently, adding more money to it will generate more interest, which will then reinvest, and so on.

compound interest exponentially

The example above is without any deposits except the initial one. You can also see the reinvested interest rates working on themselves. In this case, by letting the investment work all by itself, it returned $5000 in the period of 10 years.

The Interests Reinvest Above Other Interests

Now imagine how much could it be if you followed a strategy like dollar-cost averaging, where you keep adding funds to your investments on a periodic basis.

The more you invest, the more interest rates you will receive which will generate more interest rates. If you are persistent you’ll be able to see exponential growth, just like in the graph shown above.

To show you a clearer example of how powerful it can be, I’ll use a compound interest calculator.

compound interest calculator

I’m using my current data at the time, for you to see a real example of financial freedom which will be achieved in at least 10 years if I don’t lose myself and follow my rules. The time may vary as it depends on salary raises or if I find other sources of income along the way.

Basically, if I invested $1000 per annum at an interest rate of 12% the minimum amount for the total period of 10 years, then in the end I would have $221,392!

Plan Your Retiree Salary

Splitting that value per one year might still not be enough, given taxes that have to be paid. Here is when the lifestyle of a personal matter, and hopefully I will keep a minimalist one.

If a person follows the 4% rule which means withdrawing 4% of the total assets per year, while still giving a margin for the growth of the portfolio, then someone can achieve financial freedom because it is living off the passive sources.

How Can You Have Compound Interest?

compound interest

My favourite way of earning passive income is by investing in stocks.

I’d highly encourage you first, to read my post about 7 things you should know before investing in stocks before jumping into anything if you haven’t started it yet.

If you’re looking for some kind of alternative investment, take a look at my portfolio or read some of my crowdlending reviews:

crowdestor referral link - school of freedom

Why Is Compound Interest So Important?

Even Albert Einstein understood the power of compound interest. Here’s what he said: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

It should be of extreme importance for anyone who wants to be able to live life to the fullest. If you can have money working for yourself, start to change your habits and make it happen. It only depends on your inner strength and will to become a better version of yourself. External factors are just a distraction.

Books

Read the list of books that are helping me have the right mindset by clicking here.


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