From a man who understood math: “Compound interest is the eighths wonder of the world.”
Earnings tend to grow and then level off with time.
Savings, on the other hand, even invested at the modest return rates, grow quickly with time. Compound interest at work! More extended growth periods produce more impressive results.
What are the practical implications?
The first one deals with debt reduction. Paying off debt as quickly as possible is appealing. Once debt is paid off, the money that went to interest payments can be used for investing. But….
…Borrowers should consider putting excess cash into an investment which grows exponentially over a longer time period, the S&P 500, for example. Many would come out ahead if they paid off debt as agreed on and not faster.
The average compound annual growth rate (CAGR) of the S&P 500 has been 7.20%, with a standard deviation of 1.54%. Based on history, we can expect an investment in the S&P 500 to return between 5.7% and 8.7% over a 30 year time period. Most debt caries lower interest payments and shorter time periods!
The second implication focuses on the time frame.
Our June 15 blog post will show how to leave a legacy, how to make your grandchildren into millionaires!
Please note that the Monday Morning Millionaire Program contains opinions only. It does not provide any investment advice or endorsements.