Here’s compound interest explained for beginners in 2023 including rule of 72. You should absolutely learn about compound interest young. Compound interest is one of the most basic and important concepts to learn if you want to grow your investments.


Timeline:
0:00 intro
1:30 Compound Interest Explained
4:25 Rule of 72
7:13 Saving vs Immediate Reward
8:24 Fund Fees


About the video:
Compound interest explained in 2023, or interest on interest, is what you need to use to get your investments to grow, whether you keep your money in a savings account, invest in stocks, or in any other way where you get interest return on your investment. This is one of the most basic concepts that you need to understand when you invest to be able to make smart decisions for your personal finances and take control of your future. With compound interest, your money will work for you and grow exponentially like the snowball effect.

As time passes the earned interest increases each year, as in the second year you don’t only get interest on her initial investment but also on the interest earned in previous years, the interest is compounding.

A rule of thumb that can be used to quickly calculate the doubling time of an investment at a specific interest rate is the rule of 72 or the 72 rule. The rule of 72 says that you can obtain the doubling time of an investment by dividing 72 by the interest rate in percentage. If you expect an interest rate of 1%, which is equivalent to the interest rate of savings accounts these days, then it will take you 72 divided by 1, which is equal to 72 years to double the money. With a rate of 2%, which is about equal to the inflation nowadays, it will take 36 years for the investment to double, with a 10% interest rate, equal to the stock market, 7,2 years. So to not lose money to inflation you have to invest them with a higher interest rate.

The amount of money that you can accumulate depends on the interest rate, the principal and the time invested. The money will naturally grow faster with a higher interest rate, but remember that a higher interest usually also means a higher risk for your investment. The principal or initial investment is also important but not as important as the time.

So if you’re young, then time is on your side and it can be worth investing even smaller amounts. If you are a bit older when you start investing then if possible, it will be worth trying to invest higher amounts. But even smaller amounts will of course be able to grow with compound interest and make a difference in the end.

Another example of when compound interest has an effect is when looking at management fees of funds. It is easy to be fooled to think that a management fee of 0.2% or 2% does not matter that much. The difference is just a small percentage but with compound interest, this difference will grow larger the more time passes. For one the management fee accumulates into a larger sum as time passes and for the second the fee also decreases your invested sum which can compound new interest in the coming year. The fee of a mutual fund is commonly around 12% and for index funds, the fees are lower and usually below 0.4%. Hedge funds can have even higher fees of 2.5% or more and different performancebased fees where the fund gets to take a greater fee if it beats its benchmark index also exists.

Should we then always invest with as low fees as possible? No not necessarily. If an actively managed fund can beat its benchmark index the higher fee can be justifiable. But you should be aware that many actively managed funds are in reality disguised as passive funds.

This means they pretend to be actively managed so that they can collect a higher fee but their holding is so close to the passive index funds that there is no possibility for them to differ from the index and beat it. And then the higher fee instead makes them perform even worse than the index.

#compoundinterest #ruleof72 #doubleyourmoney

Disclaimer:
This content is for educational and entertainment purposes only. Money with Pennies does not provide investment, tax, or legal advice. Money with Pennies may have an ownership interest in stocks or companies mentioned. Do not make buying or selling decisions based on this video. All investment involves risk and the possibility of loss. Past performance is not indicative of future results.