The Ridiculous Power of Compound Interest IV: Let's Talk Money
4/6/2021
Continuing my series of posts on compound interest(I, II, and III), let’s talk about the typical use case you’ll hear about with respect to compound interest: money and investments.
This I expect will take a few posts, so for today let me start by explaining the basics about how you make money using compound interest. If you’ve read any of the other compound interest posts up to this point, you know compounding is great for turning a small number into a much larger number surprisingly quickly. With that in mind, the way you make money using compounding is essentially:
Figure out how much money you want to invest
This is your “starting number”
For simplicity, we’ve used 1 a lot in previous posts, but when you’re talking money and investments you probably want to invest more than $1
Note, you likely will also want to invest at multiple different time points (e.g. every paycheck), not just all at once in the beginning. This is an added complication that I’ll cover in a future post, but the short story is that it’s generally a good idea and it will help you
Buy the “best” investment that you can
Note, “best” here can vary based on the particular person’s risk tolerance, how much money they have to invest, time horizon, etc., etc. This is not investment advice please don’t sue me, etc., etc.
That said, all else equal you want the investment that will give you the highest (most positive) growth rate for your starting number (“investment”), most consistently, for the longest period of time possible
Wait (typically many years) and let compound interest do its thing
Profit (hopefully big time!)
At it’s core, that’s really all investing is, just harnessing time and compound interest to make money. Next time, we’ll start working our way up to a very realistic example by starting with some simpler examples first.