So at 19, he opens an account starting with $2,000. In the video above, he tells a story about Ben and Arthur that helps to dumb down the explanation of compound interest that makes it easy for kids to comprehend.īen starts reading this blog at an early age 🙂 and gets excited about investing money.
You never know, it may excite them enough to put down the controllers and pick up a rake!ĭave calls compound interest, “ A millionaire’s best friend. If you have kids that like to play video games instead of working, look no further for inspiration from Dave Ramsey explaining how compound interest works.
It compounds on itself, hence the name… compound interest. In other words, it’s interest on the interest on the interest on the interest. S starts year 3 with $1,210 x 10% = $121Īs you can see, each year his interest is earning interest not only on the original $1,000 he invested, but on the interest that has grown since then. If you earned 10% on $1,100 for year 2, the interest would be $110 instead of $100. Now, at the beginning of year 2, there is $1,100 in the account. Here’s a compound interest formula for all you math scholars:ĭr S invests $1,000 in a Vanguard index fund earning 10% a yearĮnd of year 1 = $1,100 (10% of $1,000 = $100 in interest earned) In other words, it works by calculating the interest on your entire account balance which also includes the interest that’s been accrued. The simplest way to explain compound interest is…. In other words, it can work for you or against you, and we want it working for you. On the flip side, it can also make things worse when you have interest compounding on debt. It’s also the reason the average millionaire in the U.S.
He who understands it, earns it … he who doesn’t … pays it.” I couldn’t have said it any better myself.įor anyone who wants to build lasting wealth and accomplish financial freedom, understanding and harnessing the power of compound interest is essential. The great Albert Einstein said, “ Compound interest is the eighth wonder of the world.
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