Compound interest is one of the elements of what we call the “Great Wealth Creation Trifecta”. This is a combination of 3 main elements when it comes to your investment account. When they are combined they supercharge our ability to build wealth and positions in assets. The main ingredients are:
dollar cost averaging is when you are buying stocks or index fund shares as they fluctuate up and down. Over time, the average is lower than what you would have paid at any one point in time.
401k company or government match. If you work for a company or the government that offers a match, you have to take it, this is 100% return on your money!
Compounding Interest, in other words your interest is reinvested and begins to make more baby dollars. Those baby dollars make more dollars and the cycle can continue forever!
This weeks Money Viking cartoon is about the power of compound interest. I really enjoy making these little pen and ink drawings to illustrate financial concepts. If you like them too, please share them! This is a simplified explanation of compound interest, but it is a very important concept to understand to harness your powers of wealth building.
Basically, each dollar invested earns interest, and then that interest earns interest. This is why time is more important in some ways to investing compared to amounts invested. Small amounts invested early have a lot of time to compound. Combine larger amounts and more time and the effect is even greater. Warren Buffett was always intrigued with math, as well as Mr. Einstien. Both men understood the power of compounding.