How do you explain to someone that they can become rich? That they have the power to set themselves free from workplace stress and financial anxiety?
I didn’t grow up with many resources, so I joined the US Marine Corps at age 18 in 1999. I served for 20 years, struggling to get my finances in order.
In the summer of 2019, I learned about compound interest, and magically, everything started going my way. I retired from the Corps in 2023 and haven’t had to work a day since because I’m living on compound interest.
Saving is Defense: Investing is Offense
What is compound interest, and why is it so powerful that it can change your life and all future generations? I hope to answer all these questions today, so let’s jump right in.
What is compound interest? Compound interest is when your money makes money. This sentence is the simplest way to explain it to the masses.
However, everything we do compounds in the universe, according to “The Compound Effect.” For example, who is more likely to get in shape faster, the person who eats McDonald’s (MCD) every day or a salad?
There are only two ways to harness positive financial compounding: save money and allow time to work its magic.
Most people cannot save money if their lives depend on it, and those who invest want to see results as fast as possible. You can see why most people don’t leverage the power compounding via time and savings.
What is Your Relationship with Money?
How do you convince yourself to start saving for the long term? I like to ask people about their dream retirement—where they want to be and who will be with them.
Compounding bad debt. First and foremost, you must avoid bad debt at all costs. I’m speaking as someone who was in $77,000 in bad debt at one point.
Bad debt does not originate from an asset, like a house. Credit cards, student loans, personal loans, and automobile loans are bad debt. Sorry.
Credit cards are the power of compounding working against you. The bank’s interest is gaining more interest, quickly eating away your gains at 30% annually.
America convinces us that having debt is normal, and everyone has it. However, bad debt can lead to making exceedingly terrible decisions.
The Metaverse 117: Return to the Metaverse
You will work a job you hate, think about doing bad things to obtain money, and consider lying and cheating to get ahead of your debts.
To understand the power of compounding, you must look beyond finances. For example, suppose you get a $50,000 credit card with 25% interest.
What type of decisions will you make under this kind of duress? One bad decision compounds into another. You work a job you hate and start to drink on the job. You get a DUI one day and lose your job, and your interest compounds even faster.
Compounding savings accounts. But let’s not focus on negative compounding. I am convinced that you will continue to go down the good path once you harness the power of positive compounding.
Saving & Investing 101: What is Your Risk Tolerance?
Let’s say you save $10,000 in your high-yield savings account. By the way, welcome to the “Elite Savers of America.” You earn 4% interest per year from Discover Bank.
The first year, your $10,000 turns into $10,400. The following year, you will earn interest on $10,400 instead of $10,000. The $400 you earn from the bank will compound at 4%.
In year two, you will finish with $10,816. By year 20, you will have $21,911. Would you rather be -$50,000 or +$21,911?
But compounding savings accounts is where the fun starts, not ends. We have much more exciting ways to earn higher yields.
Let’s examine index funds in the stock market. These products hold a large number of stocks and continue to grow alongside the market.
Saving & Investing with $1,000 Per Month
Each successful company in the S&P 500 (SPY) uses compounding to grow its business. To stay relevant for decades, these companies must adapt and overcome challenges.
By purchasing these index funds, you capture these companies’ progress in your brokerage and retirement accounts. The stock market typically grows at an annualized rate of 8-10% if you zoom out over 20-30 years.
If you invest $10,000 in SPY for 20 years, you could have $56,044 (at 9% returns). This is a great way to beat inflation and cost-of-living increases.
The magic of compounding dividends. My favorite way to harness this magic is through income investing. Income investors seek high current income in exchange for future growth.
Instead of investing in an index fund that may return 9% annually, I choose to invest in a closed-end fund that pays me 12% in dividends.
Rent Go Up! Which Side Are You On?
I get my cash today, and I can choose to reinvest it to grow my cash flow, save it, or use it to pay bills or go on trips. I like having choices today.
Income investing isn’t for everyone, but it can help everyone. My wife and I earn $2,200/month in dividends that we use to make life great.
Everything compounds. Everything in the world compounds, even the bad stuff. Let’s take a look at real estate. People are trying to convince others not to own a home.
However, let’s examine the rent numbers. I rent one of my homes for $2,300 (with a mortgage of $1,878). If rents increase by 3% every year, in 30 years, I would earn $5,582.
How to Use a Daily Budget
I would have no mortgage. My home value would also have risen over those 30 years. I can write off depreciation, property taxes, insurance, maintenance, etc.
I will be 73 in 30 years. It would be nice to have almost $6,000 in monthly rental passive income, right? Don’t listen to people who tell you to take the easy way.
Easy decisions lead to limited resources, while every tough decision leads to success—either through direct success or learning how to succeed next time.
Using your free time. Who will have more success in 30 years, the person who smokes weed daily or someone who creates a daily YouTube video? What do you want compounding into the universe?
I write an article and produce a book every two days. I now have 1,580 articles on my website and over 1,200 books on Amazon. I am compounding my creativity because it keeps my mind sharp.
As I write, I am thinking of new ways to generate money from thin air and ensure my kids have the power to harness compounding in their lives.
Personal Loans vs. Credit Cards
Conclusion. Yes, compound interest is the magic of your money making more money. However, there is far more to the story.
The true magic of compounding is that everything compounds. This means compounding finances, knowledge, creativity, assets, and wealth.
You can create, buy, or build assets. If you keep at something long enough (at least 10,000 hours), you will master that talent.
The toughest part of compounding is that it requires an asset. This can be your brain, talent, money, or resources. Whatever you choose, start early, as time is the number one predictor of compounding success.
If you don’t know where to start, begin with “The Compound Effect,” “The Millionaire Fastlane,” and “Think and Grow Rich.” These books will set you up for lifelong success. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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