Albert Einstein once said that compounding is the most powerful force in the universe. When it comes to your finances, he couldn’t have been more right! At a rate of 7% interest, a dollar will double every 10 years, quadruple every 20 years, and octuple every 30 years. Using the average credit card interest rate per creditcards.com on May 6, 2020 of 15.99% (very low for credit cards), your dollar will double in 4 and a half years. It will be almost 5 times greater at the 10 year mark and after 30 years, an astounding 116 times greater.
Let’s think this through with a relatable example. Instead of bringing lunch to work, you go out every day to one of your favorite lunch spots, spending on average $10 more than the cost of bringing your lunch to work. There are on average 21 days of work a month, so you will spend $210 a month on eating out for lunch. While $210 is a lot of money, over a month it isn’t too bad, right? Especially for something that is essential like food! But what is the true cost of those lunches out? What would have happened if you brought in a bagged lunch every day except Friday, so 17 days a month, saving that $10 and investing it at a rate of 7% per year? Look at the chart below:
$208,395.07. That is how much you would have saved if you put $170 away every month for 30 years and received a return of 7%. I would say those lunches are not worth that kind of cash. Of course, you aren’t guaranteed the 7% return, but the point remains. Each dollar you spend on something that was not needed is an opportunity wasted to pay your future self and live the life you want to be living.
What Does This Mean For You?
The example above relates to investing the $170 you saved on lunches every month for 30 years. While it is a great example of how something as small as lunch can change your fortunes, it vaguely shows how compounding works with debt, rather than investments.
Compounding can work for or against you. By paying the minimum payments on the debt you owe, you are letting compounding negatively impact your life instead of harnessing its power for good.
Do you remember our example of credit card interest in the article “Understanding YOUR Debt”? By making minimum monthly payments on your credit card balance which starts at $10,000, you will pay a total of $28,806.29 over 33 years in order to fully pay back that debt. That is a great example of how you let compounding negatively impact your life. If you haven’t read “Understanding YOUR Debt”, click on the link and give it a read. It will help nail home the problem with compounding if used the wrong way. Let us take a look at how paying more than the minimum payment can change your fortunes.
Minimum Payment vs $50 Over Minimum
We will use the same example as discussed above. You begin 2020 with $10,000 in credit card debt with interest at 16.14%. Instead of paying just the minimum payment each month, you will take your newfound budgeting skills to use and save an additional $50 a month to put towards your credit cards. Lets look at the numbers.
Instead of taking over 33 years to pay back your debt, you now will have it paid back in around 11 years. That is in a third of the time! But what about actual dollars spent? With interest, your $10,000 debt will cost you $17,430.87 over those 11 years. While still a high total, you have saved over $10,000 by paying the loan off 22 years earlier than with minimum payments only! That is the way to get your financial life back on track!
The above example is assuming only a $50 increase in payments being made. The differences are astounding but imagine if you increase your minimum payments by $100 or even more? You will really be using the compound effect to reach your dreams instead of letting it control your life!
What Can You Do To Harness the Power?
Changing your habits from a spender to a saver will give you the capability to harness the power of compounding in your battle to rid yourself of debt and begin living your life of riches. Finding small ways in your every day life to save a few bucks here and there will begin to add up to huge savings over time. This is not a battle that will be won over night. It will take these small decisions daily over many years to claim your victory but I promise it will all be worth it. Getting your life back from the throes of debt will give you the opportunities to do anything you ever dreamed. The power is in your hands. Wield it and conquer your world!
What Else Does Compounding Effect?
The answer is simple: Everything! Compounding is one of those silent forces at work in the background, impacting everything in your life. This blog is a product of compounding. Working every day, whether its on writing articles, bettering the website, or doing research, will continue to grow the blog until the growth in unstoppable!
How about personal health? That is 100% compounding! Do small workouts multiple times a week and you will start to see small changes in your body. After a while, and when you least expect it, you will look in the mirror and think “Wow! I have come a long way from when I started!” The problem with compounding is time. Compounding needs time to works its magic. You need to be dedicated to reach your goals. The only way to get to where you want is to work at it every single day. Want to lose weight? Make the healthy choice every single day. Want go rid yourself of debt? Lose yourself of the small expenses you incur every day that you don’t need.
Many people stop trying to achieve their goals because results aren’t apparent right away. But that isn’t you. The fact that you are here reading these words tells me this. You are ready to change your life, one small change at a time. Set your mind full stead ahead towards your goals and you can’t lose. Wield the power of compounding. It won’t let you down. You can do it. I believe in you!
Book Recommendation
It is time for my next book recommendation! “The Compound Effect: Jumpstart Your Life, Your Income, Your Success” by Darren Hardy is the perfect book to hammer home the importance of compounding and using “Big Mo” to create the life you dream of! This book is a favorite of my wife and I and one that is referenced in our home multiple times a week. It is a powerful representation of how compounding effects everything in your life without you even knowing it. Give it a read and watch it transform your life!
Love this! Excellent examples!
Thank you Sarah!