Uploaded October 2020 | Updated September 2026, 2 weeks ago
Compound Interest Explained: Personal Finance for Beginners from an engineer from Hawaii. Understanding this concept is very important when it comes to investing especially when you are young. In this video, I'll cover what compound interest is, and give some examples of how you can use it to your advantage to invest and grow your money. Feel free to follow me on instagram too: @kikoga
Albert Einstein called compound interest “the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.” So what is the concept of compound interest? In a nutshell, it’s the art of using continuous growth over time to exponentially increase value. Not linear, EXPONENTIAL! Compounding can work for you in the investing world through your investments over time, but will also against you in the world of debt that charges you interest like credit cards.
So let’s get into some examples here so you can see how compound interest works with investing especially as beginners.
Example:
So let’s say I start today at 25 years old and hypothetically making about $50,000/year before taxes putting you at around $33,000/year after taxes depending on where you live. We will try to save and invest 20% of my AFTER TAX income and that comes out to around $6,000 and we will continue to invest that every year until we retire 35 years from today at 60 years old. We are going to be investing in the S&P 500 Index which is a fund that owns small shares of the top 500 companies in the US. Historically this fund has grown at an average of 8%, and now we begin our path to glory. After 35 years of consistently investing $6,000/year, I will have invested $210,000 total into the fund. But guess what my value of total investment is at the end of the 35 years? At an 8% return each year I will be able to celebrate my 60th birthday with $1.1 million dollars in my account, nearly 5 times the amount of money I put in!
But lets take this a step further. The last 10 years of the investment period is where most of the growth happens. Out of the $900,000 of interest gains in the 35 years, $583,000 of that was in the LAST 10 YEARS of the investment period which is about 65% of your entire interest gains! Whereas the first 10 years of your investment only sees about $35,000 of interest gains so you can clearly see why the long game of this kind of investing is substantially more glorious than the short term. Think long term; its not about timing the market, its about time IN the market.
So say another investor that waits until they are 35 to start investing. So they started a little later, but want to retire the same time as me at 60 years old so they will only have 25 years in the market. So over their 25 year investment period, their investments at 60 years old will have grown to only $473,726, less than half of what we would have had if we invested 10 years earlier.
In real life, stocks and funds don’t just dish out the same return every year like clockwork. Some months can be great, but others can be terrible. So if you only invest once in a while, you run the risk of buying at inopportune times. Here’s an example. Looking at the historical data of the S&P 500, what if you invested and bought one share of the S&P 500 index every 6 months starting in September 1990 until now. Should be good right? You’re investing little by little over a long period. So if you did this you would have put in around $100,000 of your own money into the market and your value now in 2020 would be just over $200,000. So yes, its good that you invested because you made $100,000 on your investment over the past 30 years, but not so good because you would have averaged only a 4% return throughout the 30 year period. This shows that if you choose to invest at the wrong times, the idea of using an average for returns goes out the window. And herein lies the importance of the concept of dollar cost averaging; the concept of spreading out your investments over time in a consistent manner to minimize your risk against volatility or erratic ups and downs in the markets.
So if you’re in your 20’s or 30’s or maybe even your teens, start to think about purchases you make today and how spending that affects your future investment growth. And if you’re older, its never too late to start, they say that the best time to plant a tree was 20 years ago but the second best time is now. If not for yourself, for people you care about for their future, I’m sure they’ll appreciate it. But for young and older, now you know the power of compounding for your benefit, so when you’re faced with interest on debt you’ll know how important it is to pay that off quickly so you aren’t on the opposite side of the eight wonder of the world.
Compound Interest Explained: Personal Finance for Beginners from an engineer from Hawaii. Understanding this concept is very important when it comes to investing especially when you are young. In this video, I'll cover what compound interest is, and give some examples of how you can use it to your advantage to invest and grow your money. Feel free to follow me on instagram too: @kikoga
Albert Einstein called compound interest “the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.” So what is the concept of compound interest? In a nutshell, it’s the art of using continuous growth over time to exponentially increase value. Not linear, EXPONENTIAL! Compounding can work for you in the investing world through your investments over time, but will also against you in the world of debt that charges you interest like credit cards.
So let’s get into some examples here so you can see how compound interest works with investing especially as beginners.
Example:
So let’s say I start today at 25 years old and hypothetically making about $50,000/year before taxes putting you at around $33,000/year after taxes depending on where you live. We will try to save and invest 20% of my AFTER TAX income and that comes out to around $6,000 and we will continue to invest that every year until we retire 35 years from today at 60 years old. We are going to be investing in the S&P 500 Index which is a fund that owns small shares of the top 500 companies in the US. Historically this fund has grown at an average of 8%, and now we begin our path to glory. After 35 years of consistently investing $6,000/year, I will have invested $210,000 total into the fund. But guess what my value of total investment is at the end of the 35 years? At an 8% return each year I will be able to celebrate my 60th birthday with $1.1 million dollars in my account, nearly 5 times the amount of money I put in!
But lets take this a step further. The last 10 years of the investment period is where most of the growth happens. Out of the $900,000 of interest gains in the 35 years, $583,000 of that was in the LAST 10 YEARS of the investment period which is about 65% of your entire interest gains! Whereas the first 10 years of your investment only sees about $35,000 of interest gains so you can clearly see why the long game of this kind of investing is substantially more glorious than the short term. Think long term; its not about timing the market, its about time IN the market.
So say another investor that waits until they are 35 to start investing. So they started a little later, but want to retire the same time as me at 60 years old so they will only have 25 years in the market. So over their 25 year investment period, their investments at 60 years old will have grown to only $473,726, less than half of what we would have had if we invested 10 years earlier.
In real life, stocks and funds don’t just dish out the same return every year like clockwork. Some months can be great, but others can be terrible. So if you only invest once in a while, you run the risk of buying at inopportune times. Here’s an example. Looking at the historical data of the S&P 500, what if you invested and bought one share of the S&P 500 index every 6 months starting in September 1990 until now. Should be good right? You’re investing little by little over a long period. So if you did this you would have put in around $100,000 of your own money into the market and your value now in 2020 would be just over $200,000. So yes, its good that you invested because you made $100,000 on your investment over the past 30 years, but not so good because you would have averaged only a 4% return throughout the 30 year period. This shows that if you choose to invest at the wrong times, the idea of using an average for returns goes out the window. And herein lies the importance of the concept of dollar cost averaging; the concept of spreading out your investments over time in a consistent manner to minimize your risk against volatility or erratic ups and downs in the markets.
So if you’re in your 20’s or 30’s or maybe even your teens, start to think about purchases you make today and how spending that affects your future investment growth. And if you’re older, its never too late to start, they say that the best time to plant a tree was 20 years ago but the second best time is now. If not for yourself, for people you care about for their future, I’m sure they’ll appreciate it. But for young and older, now you know the power of compounding for your benefit, so when you’re faced with interest on debt you’ll know how important it is to pay that off quickly so you aren’t on the opposite side of the eight wonder of the world.
