It is always very interesting for me to read any article related to the subject of compound interest because, due to reading many of them, I have been able to elucidate that it is the fundamental basis for the creation of wealth in the short or medium term.
As you have read, compound interest is the basis for creating wealth in less time than you might think. You see, the problem with building wealth (the problem that makes it hard for most of us to create wealth), is because of the concepts we were taught growing up:
I'm talking about statements such as... You know...:
"Work hard and one day you will be a millionaire."
"Wealth is not created overnight."
"Money does not grow on trees"...
And many others...
The problem is that they didn't explain to us (we had to reason it out for ourselves), that wealth is not earned just through hard work; instead of that is earned based on well-thought-out effort, well-oriented effort towards goals. That is why I always say that in life you learn more by observation than by anything they can tell you. I always understood that you cannot be rich only through hard work because I saw how many people around me worked very hard day after day to always continue to be financially limiteds.
But basically, thanks to this, I learned that a person can literally work like a donkey, from sunrise to sunset, and remain poor all his life; because the issue is that he does not have the right mentality, the one that will allow him to generate wealth quickly and effectively. And no, I'm not talking here about acquiring a positive mindset and all that stuff about which there are loads of self-help books today (although it also has a lot to do with that); but from the fact that we must understand that there is a faster and more effective way to generate wealth in our lives: Investment and compound interest.
By the way, a couple of (rather damaging) statements we were also taught growing up is...
"All the rich are bad, because to be rich they took someone else's wealth"...
"Quick wealth is not possible, but only through illegal activities"...
"The rich are bad people... Only the poor go to heaven."
Well, I am not here today to refute all these statements, because it is not the objective of this post, but I make it very clear that all (or most of them) are false, and are the reason why we believe that wealth is something so hard to achieve, when in reality it is easy through investment, vision and compound interest.
But investing requires many things, including economic capital (money), in addition, it requires knowledge and requires a business or field in which we can do it.
Economic capital is one of the basis, I admit it, because to invest we need some money, that is undeniable. As for selecting a good field (an asset, business or activity), that already requires a study, tastes and affinities, but also the opportunities that present themselves to us.
But knowledge is the most important thing here, because we can get money through conventional work, or through a loan from a bank or from third parties; but knowledge is what will allow us to see opportunities whenever they arise and be able to take advantage of them.
And having said all this, we must clarify that knowledge is even more important, because it is what will allow us to use what was called by Albert Einstein as the most powerful force in the galaxy: Compound interest.
To all those who say that by working hard at an 8 hour job, it's possible to get rich one day, I have news for you... No... it's just impossible, there's no way to do it; even if you manage to rise to the top of the highest hierarchy within your company.
Because the basis of wealth is, as I already said, investment; and that is undeniable and undoubted, because it is a truth that has been confirmed by hundreds of great millionaires throughout history. So if your goal is not to get rich in this life, and you only want to earn money to cover your basic needs, then go ahead and continue in a conventional job without any problem
But if your goal is to acquire wealth, two words are key for you: Investment and Compound Interest. Now, every investment carries some risks, the risk of losing all the money invested, so study hard and very well what you are going to invest in and prepare yourself every day to be an increasingly better investor, because wealth can be easily acquired by anyone, but the knowledge that makes it possible to acquire such wealth must be fully and truly acquired.
Ok, I have gotten a little involved in various explanations related to the subject and I have not yet properly discussed what compound interest is and how it allows us to obtain wealth more quickly and effectively than one might think.
The great German physicist (Nobel Prize winner in Physics) Albert Einstein once said that compound interest was the most powerful force in the galaxy, and he was right, because thanks to compound interest it is possible to multiply exponentially anything that we want to multiply and in a relatively short time.
Those of us who are familiar with economics know very well that there are two possible types of interest: simple interest and compound interest.
Basically, simple interest is a type of interest that is generated on a fixed base of money, that is, on an amount of money that does not vary; therefore, as such, the interest increases on a fixed proportion over time. Example: If I have $100 and I invest it in something that earns me a simple interest rate of 1% per month, it means that I will get $1 every month. With this, after a year I will logically have $12 in my account.
Now, what is compound interest? It is interest on a cumulative-generative basis; because each interest gain that occurs on the capital, is added to said base capital, making that although the interest percentage is always the same, the proportion of what is earned is increasing over time. That is the simple and basic definition of what compound interest is, but it is even more amazing because Albert Einstein's claim that compound interest is the most powerful force in the galaxy happens only because of the ball effect of snow that makes that what is added to the base that is invested and reinvested is increasingly higher over time; which precisely makes the gains exponential in time.
Let's explain compound interest through the same example above: Suppose I have $100 and I invest it in something that generates 1% monthly profit under compound interest. Due to the snowball effect, after one year we will have a total interest of $12.68. You might say... "It's pretty much the same as what we got through simple interest." But the trick is in something else...
It turns out that each win is added on the previous basis, which makes the win you get a little higher each time. After 1 year, the capital we have is no longer $100, because the profits are not withdrawn, but instead it is 112.68; which is added time after time, and after several years a substantial difference will be seen if we compare it with what we would have obtained through simple interest. Because applying a monthly interest of 1% under simple interest, after 1 year we will only have $12 earned, but after the second year, third year and every year to come, the profit will remain the same, because the interest base simple is not cumulative, therefore, the capital on which interest is calculated will always be $100.
Now, I am explaining this in terms of an investment that produces 1% monthly profit; For this reason, the results may seem small and slow even when compound interest is used, but the reality is that if we achieve a form of investment that allows us to generate even 1% weekly profit, things become much more interesting and productive.
And let's think about it for a second; 1% weekly interest is not a big deal, we can get it by investing in certain cryptocurrencies in no time.
Suppose we invest $100 in something that produces 1% weekly earnings under compound interest: If we calculate it, we will realize that after one year we will have a capital of $675.62. Amazing isn't it?
The most skeptical will say... "Oh, but it's not a big deal, because it's not about millions of dollars." But let's remember that we are talking here about $100 of initial capital, which is a tiny capital, and after one year you will have obtained an interest of 575% on the initial base. So that we understand it well; In this case it will be as if you applied a single simple interest calculation on $100 to 575% interest. A real madness, right?
And who can tell me something that generates this kind of interest in the modern world? Saving through Banks certainly is not the way, but there are other possible way, because stocks investors can, and cryptocurrency investors can too, so it's perfectly doable.
Compound interest is a walking, progressive, accumulative interest that gives interesting results and that should be our objective if our goal is the exponential accumulation of economic wealth.
And the great thing about compound interest is that, by its nature, we don't need to have a large capital to be able to use it, because it works even starting with very little capital. In short, by doing things the right way, we can become rich even when we have almost no capital to invest.
In fact, I have done calculations through excel sheets and someone who using compound interest with a capital as small as $10 (which basically anyone can have), and investing in something that earns at least 1% interest daily, after one year it would have a capital of $359.50; but after two years, the capital would be $12,923. Yes, just as you read it.
And to make the calculations short, I can tell you that starting from the base of $10, and being constant, operating every day of the year, a person can become a millionaire, because after 3 years, the capital would be $464,604.79 and In the fourth year, the capital would be $22,512,578.90. Yes, after 4 years, we would have $22 million starting with just $10. A real madness, right?
This is why compound interest is said to be an unbeatable force. But now, many will say? Who then can become rich? Because what can we invest in that generates at least 1% daily interest? Well, if we are attentive, the answer is: Cryptocurrencies. In fact, with a basic trading strategy we can obtain 1% profit on our capital; and I say 1% to be conservative, because daily profits through basic trading can be from 1% to 3%; without huge effort.
I will not tell you about any specific cryptocurrency, but I will tell you that by operating with those that enjoy the most liquidity in the market, it is possible to achieve great results.
So the thing is, it's practically much easier to get rich through cryptocurrencies using compound interest; because there will be days that you will earn 1% interest, but then there will be others in which you will earn 2% or 3%. Of course, maybe after 4 years you won't have 22 million dollars having started with $10, but what if you manage to have at least a couple of million dollars earned this way? Because it is true that not every day we will operate, not every day there will be opportunities to earn, and many times we will lose operations in the process, but even so; there are no excuses for not being millionaires in 5 years if we use compound interest properly.
No one can deny that achieving wealth in 5 years is difficult for most people; in fact, most people spend their entire lives working without ever getting out of poverty; so achieving wealth in just 5 years starting from something as ridiculous as $10 is a true feat, it is a very well kept secret that very few people will dare to explain it to you as I have here today.
Certainly having the patience and perseverance to achieve these great results through compound interest is what will be most difficult for most people. But theoretically speaking, achieving wealth in a relatively short period of time is perfectly possible; math never lies.
What do you think about the topic discussed? Please comment.
@piensocrates