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Compound Interest Explained - Why You Should Reinvest Your Profits - YouTube
Channel: Finest Finance
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Warren Buffettâs net worth is around 90
billion dollars today.
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But did you know that it was âonlyâ one
billion when he was 60 years old?
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In this video you are going to learn how to
turn $500 into tens of thousands of dollars
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with long-term investing.
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Whatâs going on guys, welcome to a new video
about why you should reinvest your profits.
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Let me start by saying that this video isnât
going to make you rich overnight, it shows
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why you should reinvest your profits in the
long run.
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With this method you can turn your $500 into
tens of thousands of dollars, but it will
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take a long time.
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Letâs say you invest $500 for S&P500 for
the average 8% return on investment.
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In five years it would be worth $734.66.
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In 20 years it would already be over $2300.
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And in 60 years over $50,000!
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So how does this happen?
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The reason for this is the compound interest,
let me show you what it means!
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All these examples that I am about to show
are not made up stories that I want you to
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believe.
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I am using the past 40 years of the S&P 500
for the average annual return on investment.
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But before we get into compound interest,
letâs first show an example of simple interest,
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which means that you are not reinvesting your
profits.
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Letâs use a $500 investment and 8% annual
interest rate for our examples.
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The first year your return on investment will
be $500* 0.08 = $40.
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Now you donât reinvest your profits, youâd
rather buy 8 starbucks coffees.
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So the second year your return on investment
will be the same $500 * 0.08 = $40.
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And now you spend it again.
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The third year comes and your profits will
be the same, $500 * 0.08 = $40.
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When you are not reinvesting your profits,
your profits will stay the same forever.
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But because of inflation your money loses
value all the time, so the $40 wonât really
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be worth $40 in the long run.
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Only way you can make more money without reinvesting
your profits is by investing more.
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So that is the reason why you should reinvest
your profits.
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When you reinvest your profits, it has a snowball
effect, which is called compound interest.
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Letâs show an example of compound interest
using the same numbers as in the previous
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example, the principle being $500, and the
annual interest rate of 8%.
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So again your first year profits will be $500
* 0.08 = $40.
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This time though you have found Graham Stephans
youtube channel so instead of wasting your
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profits on starbucks, you decide to drink
20 cent iced coffee and reinvest the $40 dollars.
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So now in the second year your profits will
be $540 * 0.08 = $43.2.
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Now you reinvest that again and your third
year profits will be $583.2 * 0.08 = $46.6.
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Now you probably think that why would you
want to reinvest your profits if it only makes
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you couple dollars more a year?
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Well, because in the long run it makes a huge
difference.
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50 years later with simple interest your profits
would be the same $40 a year, but with compound
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interest they are already over $1700 a year.
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So in 50 years your annual profits are over
43 times more than they would be without reinvesting
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your profits.
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The time and annual interest rate have a huge
impact on your profits.
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You can check the website in the description
for a compound interest calculator, so you
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can test out how it affects your profits.
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For example if we used 15% annual interest
rate instead of 8% the $500 would be worth
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over half a million instead of $23,000.
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If you invest for 10 years your profits would
be little over one thousand dollars, but if
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you invest for 50 years they would be almost
23.500 dollars.
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That is why you should start investing as
soon as possible, your future self will thank
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you later!
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So it is simple to turn your $500 into tens
of thousands in the long run.
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You just have to invest your money as early
as you can and for as long as you can, and
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reinvest your profits .So why isnât everybody
rich then?
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Most people lack the discipline, or just want
to enjoy their money.
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When I try to explain to my family why I wonât
spend $5 on a coffee, or why I havenât bought
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new shirts for 5 years, they think there is
something wrong with me.
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But that $20 shirt is really worth a lot more
than $20, in 30 years it would be worth $200.
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Ask yourself a question: would you rather
take $1 now, or $10 in 30 years?
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Let me know in the comments!
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With that small amount most of you probably
would rather take one dollar now than wait
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for 30 years to get that 10 dollars.
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But what about $10.000 now or $100.000 later?
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That is how I personally think about every
product I want to purchase.
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In 30 years with 8% annual interest rate,
every product would be worth 10 times more.
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Is it really worth buying those starbucks
coffees for $50?
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Or a new iPhone for $10.000?
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Iâm not saying that you should never buy
anything you want, just think about the value
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it provides now versus in the future.
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Of course you can spend some money every now
and then, but imagine paying even $2 a day
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for coffee.
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It is $730 a year, and $7300 in 30 years.
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Does it really bring so much more value compared
to making your own coffee for 20 cents?
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Iâd rather save that money, invest it in
the stock market, and then reinvest the profits
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that I make, slowly making the snowball so
big that It would smash that like button into
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pieces!
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When you constantly reinvest your profits,
and also save more money to invest every year,
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the snowball really starts to grow into a
huge avalanche.
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Letâs just use that coffee for example again,
if you manage to save that $700 a year, and
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your first investment was $500, you would
have over $90,000 in 30 years.
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And almost half a million in 50 years.
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And that is only with the coffee.
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Letâs say you start to save money on clothes,
shoes, drinks, lunches and cars.
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Investing $2000 a year is over $1,200,000
in 50 years.
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So there you go, you are now a millionaire
with just saving and investing $2000 a year
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and reinvesting your profits.
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It is slow and boring way to become a millionaire,
but it sure works!
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Personally seeing the profits grow more and
more every year really makes it addicting,
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and I want to save more and more, so I can
invest more every year.
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Some people donât want to invest their money
because they donât really know much about
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investing, and they have heard that you could
lose everything.
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While it is true that sometimes the market
crashes, in the long run the S&P 500 has averaged
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that 8% annual interest rate used in the examples.
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Great thing about index funds is that you
donât really have to know much about investing
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to invest in the S&P 500 index fund.
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If you want to know more about how to start
investing, you can check the top-right corner
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for a step-by-step guide on how to make your
first investment!
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Shortly put, you just need a brokerage account,
some money to invest and to choose which index
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fund you want to start investing in.
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This takes less than a couple hours, and you
can automate it for the rest of your life!
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You could use brokerages like vanguard, fidelity
investments and ally invest for example.
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So that is how you turn your $500 into tens
of thousands of dollars, and the reason why
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you should reinvest your profits.
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They will be worth tens of times more than
the profits with simple interest would be
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in the long run.
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The most important thing is to start investing
as soon as possible, and to start saving money
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to invest more every year.
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This has a snowball effect that makes a huge
difference compared to simple interest.
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Invest $2000 a year and become a millionaire
in 48 years!
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The more you save and invest, the quicker
you become a millionaire!
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worth tens of times more than the profits
with simple interest would be in the long
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run.If you find this video helpful, smash
that like button and share this with your
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friends, it would really help my channel to
grow!
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Subscribe if you are interested in personal
finance, investing and book summaries, next
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weekâs video will be a book summary for
the book Way of the wolf by Jordan Belfort!
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You can also check my other social medias
on the screen.
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My name is finest finance, have a great day
and I hope to see you in the future videos!
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