Day Two - Compound Interest

Let's talk about compound interest.

There's an alleged quote that says it's the eighth wonder of the world.

I don't know if that's true.

It's attributed to Albert Einstein.

Probably isn't true.

But, basically it's saying, wow, compound interest is really powerful.

So yesterday or whenever, if you just watched it, we spoke about inflation, which is kind of like the negative of why we'd want to invest because we just don't want our money dwindling away, doing nothing in cash savings for us over the long run.

Compounding is why we would want to invest like the juicy reward, which is that our money has money, babies, makes more money, makes more and more money.

That bigger amount then can make more money and then over time, over decades, we're talking here like, this is such a long game, then we will be in a really good financial position.

Position.

So compound interest is basically the snowball effect of your money making money making money making money.

And I gave the example of a penny doubling every day and how much you end up at the end of the month.

And it's kind of crazy.

So let's give another example If we had £20,000 in cash, $20,000, you can insert.

Whatever currency you use here is all the same.

But say we have this £20,000 in cash and left it there in a bank account where we're getting 0% interest rate.

So no matter what the timeline is, you're always going to have £20,000 in there.

And then as we discussed in the previous thing about inflation, over time that £20,000 will buy you less and less stuff.

So Over time that £20,000 is losing its purchasing power.

It's not going to buy you as much stuff.

It's going to kind of get smaller and smaller and smaller amounts of stuff that you can buy with that £20,000.

Bear with me if you're like, hannah, I haven't got £20,000, just use it for an illustration.

So, £20,000, 0% savings, which is going to be £20,000 if we invested it in 25 years time.

And we're going to imagine here that we make 8% every single year.

That's the average that the stock market has made over the last 30 years or so.

I'll go into that, in another video.

So hold tight on that.

If you're like, where's the 8% come from?

Spoiler alert.

It doesn't come in a neat 8% every single year.

Some years it will be more, some years it will be less.

But over time, over decades, averaged out by 8% of growth every year.

So we'll use that as an example.

That's the number that I kind of usually pop into calculators and things like that when I'm trying to see how much my investments could grow over time.

And I'll give you an example of a calculator.

So can you can go in and put in your own numbers of like, if I put, if I did 50 pounds a month, if I did 250 pounds a month, what could I have in 10, 20, 30 years?

So 8% is the number that I tend to use for that.

So let's go back to that £20,000 example.

If we let that grow and we imagine it's going to make that 8% a year for us on average, that means that in 25 years we would have £147,000 in our account.

So that is a huge amount of money that has grown just from the fact that it's been invested.

So we didn't add anything else to it.

So we just put the 20,000 in and then the investment growth, returned 127,000 for us.

So then our total amount we have in there is 147,000 pounds in 25 years time.

So you can see over time like, wow, that is an enormous amount of money is made just from the fact that it's invested rather than sat there not working for us.

Now if we go up to like, if we left that for 50 years, and I know that sounds like a really long time, but we are all living a long time, okay?

So we have to be thinking this long term.

And I know it's sometimes a bit boring, but also the thought of not having that money when you're older is also quite terrifying.

So if we put the small amounts in now, we Give it the longer time for us to let it grow.

So in 50 years time, that £20,000, if you just left it to grow, got that 8% a year, 50 years, that would now be worth, just over £1,000,000.

£1,078,000, which is ginormous.

And what you can also see here is that actually, well, it grew a lot more from years 25 to 50 than it did in the first 25 years.

And that's because as the pot of money gets bigger, it can then make you more and more and more.

And that's what compound interest is, is that that, larger and larger amount you make as you leave it over time.

If you have your investment set on accumulation mode, it will just snowball over time if you just leave it.

And that's why this investing trash is kind of boring, because we're kind of just like setting it up and leaving it to grow and then it's just there for us when we need it.

So we learnt a new jargon word.

I often think that investing is just about learning a different language.

Sometimes people feel like it's really intimidating or you just kind of zone out with it, but it's just because there's loads of different words you haven't, you know, heard before.

So now we know what compound interest is.

It's the way that your money makes money, makes more money and that snowballs over time.

So we're just making huge amounts more from our investment returns than what we actually have to put in ourselves, which is why it's so powerful and such an amazing kind of carrot incentive for us to invest.

So, next video, I'm going to break down the 8% growth number I gave you and talk about the strategy I use to try and minimize my risk.

Because basically we know the whole system is set up to make money.

It's actually not hard to grow your money and make your money make money.

That is literally what the whole of our economic system has been designed for.

What you actually need to figure out is how to do it in a way that you don't lose money.

So that's what we're going to go into tomorrow.