Managing your money efficiently can sometimes feel like a chore. (Even to me from time to time!) It’s the same with household chores. I love my house clean, but the actual cleaning it part? Not so much.
But if I had to pick, I would say my favorite chore to do is laundry. After some upfront effort of sorting and soaping, you can kick back and let the machine work its magic. Recently, I was enjoying a glass of wine on the couch, hearing the laundry run and I got to thinking… laundry is a lot like investing!
Investing is like laundry because after some upfront effort you can kick back and let your money work for you.
How does money work for you? The magical equation of compound interest. Let me break this down for you.
When you invest $100, you will earn interest on that money. Lets say you earn $10 in interest in year one. That interest gets added to the original investment and you will start year two with $110 invested. Assuming the interest rate is the same in year two, you will now earn $11 in interest and start year three with $121. This might sound like chump change in my simple example, but if you are investing more money each year, this starts to add up fast.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein
The most important factor is time.
The more time your money has to grow, the more benefit compound interest will have to you. This is why you hear the financial advice, ‘start early!’ ‘invest what you can now!’
Everyone needs to understand this concept, its the first step in getting your money to work for you. I know, if you have never done it before investing can be daunting. But once you get it, it’s fun. (I swear!)
Here is one resource to get you started:
Play with this calculator from Money Chimp to further understand the benefit of compound interest: http://www.moneychimp.com/calculator/compound_interest_calculator.htm