Compounding Interest is a Thing!

Compounding interest (when it comes to investing) is amazing! It’s a bit like watching a small snowball roll downhill, collecting more and more snow as it goes and getting bigger and bigger. For all my Microbiology nerds, it’s kind of like a single cell of E.coli that splits and divides on an agar plate. Then those two cells split and divide and then those four cells split and divide and so on until your culture plate is covered in E.coli.

Credit card companies know all about compounding interest as that is how they make a large portion of their money. You can use that same knowledge to make your own monies make more monies.

I’ve been using compounding interest to my advantage for most of my life without even knowing it, through savings accounts, CDs, and investments. I also avoid credit card debit like the plague because I want my money to work for me and not against me. But I was quite old before I really understood what compounding interest was and why it was so fantastic.

I put $2000 into my first 401k and my employer matched it. The retirement account was a blended mix that was mostly just index funds monitoring the market. I then switched companies but did not touch that 401k.

I just let it ride! 

That account just kept growing and growing (I did eventually have to roll it over into an IRA due to the original company being sold, but the investments were still very similar). At first I thought those specific index funds were just amazing! Like, I was the best at picking funds. Go me!

Every I time I looked, there was more money in there. My money was making money all by itself! I’ve averaged 12-13% annual growth, which you can’t necessarily count on long-term. If the only growth I saw was from the principal initially invested, I’d only have about $13k. Instead, that account is currently sitting at over $40k after 20 years!

So what happened?

Well, my investments made some money. That money went into the account and made some more money and so on, like a snowball down a hill (or E.coli on an agar plate!). Money making money off of interest money. It’s pretty cool. I was lucky that I started young (thanks, parents and grandparents!). I was also lucky that my parents where privileged enough to be able to invest and teach me in turn. The younger you start, the more time that money has to snowball into a good chunk of change. 

Another brick in the wall

Mr. ItchyFeet is always so frustrated that talking about money, at least in the US, is so taboo. Far too many people lack basic financial literacy which sets them up for economic disadvantage, if not outright failure, right from the beginning. In his more cynical moods, he’s convinced that making it a stigma is all about keeping the masses in line.

Truly wealthy people have no trouble talking about money. It’s everyone else who are discouraged from discussing it, many times via social pressure, but also via outright (often illegal) contracts that explicitly deny you the right to discuss compensation with coworkers. It’s a stigma he believes we need to break in order to allow everyone to build a solid financial foundation rather than living paycheck to paycheck.