Why you should compound your money
Compounding Your Money - One of the most powerful assets you have is time.
Most investors don't understand how compounding works and how powerful it is. The math can be difficult, but I learned early in my investing journey how to make it easy.
And now I am going to make it easy for you.
The Rule of 72
What Is the Rule of 72? The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest.
By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
To simplify, if you can produce a 9% return annually, it will take you 8 years to double your money.
9 x 8 = 72
I am going to assume most of my followers are 30 years old or below.
Let's say you are 25 years old. If you can invest $5,000 in the $SPY (S&P 500 Index, a basket of the 500 largest companies in the USA) today with a historical average return of 8% per year, let's see how much you can net by the time you retire.
Every 9 years we are doubling.
5k to 10k. (34 yrs old) 10k to 20k (43 yo) 20k to 40k (52 yo), 40k to 80k (61k yo) 80k to 160k (70 yo)
$5,000 turns into $160,000, and all you have to do is buy the $SPY once (at 25 yo) and hold it “forever” without ever selling (until 70 yo). Now if the return is 9%, or 10%, those numbers skyrocket.
In the illustration above, you can see how important it is to start early.
NOW, this was if you invested just once (5k) at 25 without ever investing more again. If you can save and invest an additional 5k a year (or 400$ a month), you can start to do the math on how quickly you can get to 5m or 10m, or how much faster you get to 1m (or whatever your retirement number is).
I hope this lesson makes it easy for you to plan and helps you understand how important saving/investing immediately is. For every $5k you spend on stupid shit today, you give up $160k in the future. It should make you think twice before spending foolishly.
Lastly, if you LOSE money, you kill the whole equation. Consistency is key. Small losses are ok but if you wipe out 50% on a trade, you just destroyed the model (SO DO NOT TRADE!).
The lesson is, slow and steady wins (i.e. BUY, HOLD and REINVEST INTERESTS AND DIVIDENDS)
There is a reason why Buffett and the other OG's have made so much. It's the compounding magic. Buffett is 89!
Extend the 5k model out, 160k to 320k (79 yo) 320k to 640k (87 yo)
All on 5k only (and without having to do any work)
In the next post, we will see why crypto is “compounding on steroids”, meaning that, in crypto, compounding works even faster which means you can start with less than 5k and make more than you could ever dream of, or retire much faster than you thought was ever possible.
Text written by @crypto.with.kev