you know I always look back on high school and I'm wondering why we didn't learn about how to build
up our investments and how to build up wealth back then where were we on that because if I
were to start it then man we'd be so much richer today right this formula could make us absolutely
filthy rich now interestingly enough a lot of Americans don't really understand the difference
between simple interest and compound interest in fact the figure is over 69 percent of Americans
and you know the funny thing is is I thought the same thing so let's say right here's your graph
and you're going to invest money right here from the beginning right down here right I would think
it's probably going to go something like this right the goal is it's going to rise over time
and everything will look fine but actually that's not how it works that's not how compound interest
Works believe it or not it's more like this what a huge difference and it's not a scam this isn't
some alternative investment or crypto that just came out or anything like that this is just basic
math right here is what I'm missing out on because I didn't get started earlier so that's okay we can
get started here today and I'm going to give you all the details that you need to know with the
power of compound interest now as I showed earlier this is the formula right here this right here I
mean first of all when I look at this all right when I look at that I think oh my God Matt I hate
math and so how do we like decipher this and make it a lot easier to use well hello Google Sheets I
took the pain and Agony out of this long formula and I plugged it into Google Sheets that you just
plug in your numbers and it'll automatically calculate for you it took me some time because
I don't like math the only thing I ask is please like the video I would appreciate it if you find
this valuable so what we're going to look at is how much money you're going to invest that's the
first box right the interest rate is how much your investment is going to grow over time the
compound rate and the years I'll also explain but let's just say we're going to put in ten thousand
dollars and you know I think about if we could get a gift from Grandma maybe after we graduated
high school and we actually did this just wait to see where we would be today I'm gonna plug in the
ten thousand dollars the interesting I'm gonna use ten percent now a lot of people ask me why
10 well it's because over the last 100 years the stock market has grown an average of 10 per year
sometimes gonna be more sometimes it's gonna be less as you can see right here on nerd wallet
the average stock market return is about 10 per year for nearly the last century as measured by
the S P 500 Index that is why I'm going to select 10 because we're going to put our money into the
stock market not into some piggy bank or something like that then the compound rate is it's going to
happen once every year because as I mentioned 10 per year so we would only say one year and then
the key point is how many years are we going to look at that maybe we want to look at the
next 10 years 20 years 30 years uh just for the sake of this let's say for the next 20 years now
look at the big difference here the future value of compound interest will grow our ten thousand
dollars to sixty seven thousand two hundred and seventy five but let's compare that because that
becomes even more interesting with the graph that we looked at a little bit earlier most
people think it's simple interest and simple interest is just literally taking that ten
thousand dollars and then every year you'll get ten percent of the ten thousand dollars which
what's ten percent of ten thousand dollars it's one thousand dollars so that means you're just
gonna get a thousand dollars every year from here on out you're not thinking about the compounding
effect so the simple interest value check that out thirty thousand dollars what a big difference
between what we thought the growth would be and what it actually is now if you already knew
this that's great but the power of just simply adding in money and letting it grow over time
can be significant in this case ten percent of ten thousand dollars as I mentioned earlier is
one thousand big ones but the difference here is the next year that second year you're not gonna
get the ten percent growth on only ten thousand dollars you'll get you're 10 on 11 000 because
you're gonna add the one thousand dollars back in and that's what compound means so it's gonna take
eleven thousand and then whatever ten percent of eleven thousand well that now goes back into it
now you have like twelve thousand one hundred dollars and then that will compound and that's
what grows us up to that sixty seven thousand dollars in twenty years but if you're eighteen
years old let's say and you decided to take ten thousand dollars now let's say you retire at the
age of 48 that's your goal so 30 years from now 18 to 48 you put in the 30 you're gonna have 174
000 at 48 years old versus a simple interest value of only forty thousand now you might say
to yourself well wait a minute I cannot retire on only 174 000 well I'm I'm glad that you have
that mindset because surprisingly according to US news right over here the average balance at
the age of about 48 is only a hundred and twenty three thousand dollars as of 2022 and if we School
up here to the age of 60 the average 401k account balance is only 100 ninety eight thousand dollars
so either you're gonna live off of social security or you're gonna hope that you don't have to drain
your account that much and live off of that 198. so going back to our Google sheet of course 174
would kind of make you average but you're going to be a little bit smarter and say okay I'm gonna
put my ten thousand dollars of Grandma's funds into the account and then I'm going to come up
with an investing plan like we talked about in a video last week an investing plan that's going
to say I'm going to continue to contribute 100 every month from the age of 18 to the age of 48.
I'm gonna retire before anybody else because all my other friends they're going to work until the
age of 65 I'm going to retire at the age of 48. now believe it or not the government is actually
doing something good here with investor.gov you can actually put in the same numbers that
we just looked at ten thousand dollars and then the monthly contribution that I mentioned of 100
a month and what we're going to look at is 30 years from the age of 18 to 48 and the interest
rate of 10 and it compounds annually so if we hit calculate here's what we're looking at so we're
looking at a total of 378 one thousand dollars now with a mere one hundred dollars a month from that
point to the other point now what I recommend you do is check out the link in the description below
I'm gonna link to this exact calculator that we're using and you can plug in your own numbers let's
say you're not starting with that Grandma only gave you a thousand dollars to start off but
you're able to put in 500 a month play around with these numbers to see what could happen you
can see right here at five hundred dollars monthly contribution from 18 to 48 wow you're gonna have
one million dollars that's beating everybody we just looked at as a result of compound interest
I'll leave you with this fun fact the rule of 72 this was actually uh dating back to 14.94
so you know much older than you and I and it was actually coined by Luca pacquiaolet I don't know
if I'm saying that right or not but he referenced this rule in comprehensive mathematics book called
Summa de arithmetica I don't know if I'm saying that stuff right again and what's so interesting
about the rule of 72 is that you take this magical number of 72 and you divide it by your interest
rate it actually will tell you how many years it'll take for your particular Investments to
double going back to the Google Sheets if we got our ten thousand dollars how many years is
it going to take for me to get twenty thousand dollars well all I have to do is plug in the
interest rate and write down here you'll see it says Rule of 72 7.2 that is 7.2 years for
my ten thousand dollars to double if I increase the interest rate let's say the market just all
of a sudden does well and continues to outperform what it used to do at 15 it'll only take 4.8 years
for my investment to double now if the interest rate's only four percent it's gonna take 18 years
you get the point but that's also plugged into this little calculator here on Google Sheets and
because I love you guys so much I'm gonna give it to you for free link down in the description
below all I ask is go up to file and select make a copy do not try to edit the actual document save
it for yourself and your own Google Sheets or on a Microsoft Excel or whatever you'd like to use
share this video with others and don't hold back on the compound interest secret because that would
just make you not cool and check out this video next and we'll see you on the next next video
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