Compound interest is often touted as one of the most powerful concepts in finance. This post will explain how compound interest works and why starting to invest now can lead to exponential growth over time.

Since this is such an important aspect of becoming financially free (or just retiring someday), we are going to focus on examples and have this be a short and sweet (but powerful) post. Read this, understand its power quickly, and then take action to purchase your freedom.

Compound interest is quite simple, it is investment gains that you receive from investment gains you already received, in the past. Therefore, it is wealth that you build by having to do nothing more than investing money originally, and letting it grow over time to grow you more money. You do not have to work one second more than you originally worked to gain your initial money you invested. Your initial investment grows in value, stays invested (a key factor), and then that growth (being invested still) grows you more wealth on top of the money you invested that is growing you wealth. And over, and over, and over again.

Soon, you have many dollars, that you did not work to make, staying invested, and going out and making you more dollars by the simple fact that they were created by your original investments.

This is a lot of words that could sound a little confusing. But, here is what you do to receive compound interest:

1. You invest money (this could be in Mutual Funds/ETFs, Stock/bonds, Real Estate, or whatever – that is actually an investment).
2. You let that money grow more money over time (this could be capital gains – a.k.a growth in value of what you bought, or dividend income, or interest income, or rent, or a combination of these).
3. You keep the new money that you made, invested, as well. Again, very important.
4. The new money that you made, being invested still, then produces its own capital gains or dividends, or whatever income/growth you are invested for. This happens simultaneously to the money you initially invested, which is still invested and producing you more wealth, also (capital gains, dividends, interest, etc.).
5. You then leave that new money that you gained, from your previous growth and dividends, invested to produce its own capital gains, dividends, interest, etc., which produces more money, and so on.
6. You keep investing your own money (monthly, weekly, daily), which creates more new money of its own, that you keep invested to make more money, and so on.

Soon you have this expanding, independent machine that is growing and reaching out to find you more and more money, without you having to do much of anything. It is pretty crazy, really.

So, quick examples to help you visualize this growing power that you have access to.

1. What if you invested $250 a month ($3000 for the year) and you were able to get a 7% average return over time (prior to inflation, etc. being calculated). Well, with all those $250 monthly deposits into investments and creating their own growth, after 30 years you would have over $294,000. IF YOU KEPT ALL OF IT INVESTED THE WHOLE TIME.
   • The best part of that – if you invested the $250 a month for 30 years, that would only be $90,000 total. So, over $204,000 of your growth was compound interest/growth that worked to create you more money without you having to do anything.
2. What if you invested $500 a month for the 30 years? You would have over $588,000. Of which over $408,000 was compounded interest/growth (that you did nothing for – other than leave your money invested to grow).
3. What if you invested $1000 a month? That equals over $1,176,000, of which over $816,000 was compounded growth that you just let do its thing for you.

Do not take this information lightly. Do you want to buy your freedom and never have to be forced to be at work at a certain time, or miss your child’s event, or miss adventures around the country/world? Well, let this information sink in. The faster you invest, the faster your wealth grows while you don’t have to do anything. That leads to the faster you can be independent and free to do what you want, when you want.

The End. Or is it?