COMPOUND INTEREST explained for beginners 2023 (including rule of 72) 🚀

Here’s compound interest explained for beginners in 2023 including rule of 72. You should absolutely learn about compound interest young. Compound interest is one of the most basic and important concepts to learn if you want to grow your investments.

Timeline:
0:00 intro
1:30 Compound Interest Explained
4:25 Rule of 72
7:13 Saving vs Immediate Reward
8:24 Fund Fees

About the video:
Compound interest explained in 2023, or interest on interest, is what you need to use to get your investments to grow, whether you keep your money in a savings account, invest in stocks, or in any other way where you get interest return on your investment. This is one of the most basic concepts that you need to understand when you invest to be able to make smart decisions for your personal finances and take control of your future. With compound interest, your money will work for you and grow exponentially like the snowball effect.

As time passes the earned interest increases each year, as in the second year you don’t only get interest on her initial investment but also on the interest earned in previous years, the interest is compounding.

A rule of thumb that can be used to quickly calculate the doubling time of an investment at a specific interest rate is the rule of 72 or the 72 rule. The rule of 72 says that you can obtain the doubling time of an investment by dividing 72 by the interest rate in percentage. If you expect an interest rate of 1%, which is equivalent to the interest rate of savings accounts these days, then it will take you 72 divided by 1, which is equal to 72 years to double the money. With a rate of 2%, which is about equal to the inflation nowadays, it will take 36 years for the investment to double, with a 10% interest rate, equal to the stock market, 7,2 years. So to not lose money to inflation you have to invest them with a higher interest rate.

The amount of money that you can accumulate depends on the interest rate, the principal and the time invested. The money will naturally grow faster with a higher interest rate, but remember that a higher interest usually also means a higher risk for your investment. The principal or initial investment is also important but not as important as the time.

So if you’re young, then time is on your side and it can be worth investing even smaller amounts. If you are a bit older when you start investing then if possible, it will be worth trying to invest higher amounts. But even smaller amounts will of course be able to grow with compound interest and make a difference in the end.

Another example of when compound interest has an effect is when looking at management fees of funds. It is easy to be fooled to think that a management fee of 0.2% or 2% does not matter that much. The difference is just a small percentage but with compound interest, this difference will grow larger the more time passes. For one the management fee accumulates into a larger sum as time passes and for the second the fee also decreases your invested sum which can compound new interest in the coming year. The fee of a mutual fund is commonly around 1-2% and for index funds, the fees are lower and usually below 0.4%. Hedge funds can have even higher fees of 2.5% or more and different performance-based fees where the fund gets to take a greater fee if it beats its benchmark index also exists.

Should we then always invest with as low fees as possible? No not necessarily. If an actively managed fund can beat its benchmark index the higher fee can be justifiable. But you should be aware that many actively managed funds are in reality disguised as passive funds.

This means they pretend to be actively managed so that they can collect a higher fee but their holding is so close to the passive index funds that there is no possibility for them to differ from the index and beat it. And then the higher fee instead makes them perform even worse than the index.

#compoundinterest #ruleof72 #doubleyourmoney

Disclaimer:
This content is for educational and entertainment purposes only. Money with Pennies does not provide investment, tax, or legal advice. Money with Pennies may have an ownership interest in stocks or companies mentioned. Do not make buying or selling decisions based on this video. All investment involves risk and the possibility of loss. Past performance is not indicative of future results.

[TheJackCain-]

This is my fifth year after retirement. I’e been following the 4% rule thing I saw on a youTube channel, but this isn’t really how hard I expected things to be. After I cashed out a lump sum, I still have about $760k left, but at this rate, and with how the market is (we were putting money away in an index fund), I’m starting to get really worried.

[jhanick]

I finally gotten to 1M on my portfolio. Looking back my balances totaled $135k 8yrs ago. I haven't done anything special except let it grow. My income has doubled so I'm contributing more but I think interest has done most of the growth

[queenidowu]

I'm 54 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, and we are finding it impossible to replace them. We can get by, but can't seem to get ahead. My condolences to anyone retiring in this crisis, 30 years nonstop just for a crooked system to take all you worked for...

[emrebkbo]

Hello from Turkey. I am investor for financial independence and retire early. I wish everybody achieve their goals.

[blaquopaque]

Currently, high interest rates are impacting 20+ year bonds, REITs, and Utilities, presenting a favorable opportunity for Dollar-Cost Averaging (DCA) or investing. i'm looking to invest around $250k. Your insights in a video on this subject would be greatly appreciated. Thank you

[skoopqueen]

Thanks for increasing my knowledge this topic, I recently subscribed to your channel. I want to give a big shout-out to all those working tirelessly to earn a living and build wealth during this period. My wife and I are both retired as an engineer, we are debt-free, and we're living smart and frugal with our money. Despite the economy challenges, we're still earning passive income thanks to our savings and investments. Investing lifestyle has enabled us to earn a steady monthly income through passive means, and we're grateful for it.

[DafyddMorse]

Compound interest is growing my money whilst I watch YouTube videos! Whoo hoo!

[pandabossanna]

Absolutely love this style of videos!! Compound interest is something so many more people need to understand, great video girl :)

[o_brown]

Thanks alot for making this! I really needed it.

[keysame]

Is compound interest get only from second year? Or can we compound interest if deposit only one year?

[FinanceUnboxed]

New sub here, loved the content. Good point raised that the rule of 72 doesn't factor in any tax - easily forgotten by most. Keep up the good work on YT!

[themoneywizard-shanemulvey]

Taking advantage of compound interest is very important, even more so for the younger generation... great video

[thatone_daniel]

hey! 👋🏻 saw your comment on Cathrin Mannings video and decided to stop by! Awesome content! Keep crushing it ❤️!

[Angela-krlt]

Great video. I love compound interest. This is really well explained. I have just subscribed. Good luck with your channel.

[EasyWealthBuilding]

Very well explained and illustrated. Nice job, so as Cindy! :) Liked. Like #6.

[NolanGouveia]

Right now more than ever you need to consistently invest in to solid index funds/ ETFs with low fees. Market is down but not all companies that are down are going to recover, but those ETFs will keep you much safer while investing in this bear market! This is how I made over 6 figures during the last bear market!

[coachaaronmba]

This is a great video! Compound interest are 2 of my favorite words! Just subscribed!

[ChewonThat]

Thank you for sharing! This is such important information for investing, great advice!

[DogMentalitySportsTalkWithChri]

Invest the investment thats it thats all. Let it grow

[christopherngeleoma]

thanks alot i was not under standing it but now i understand