Passive Real Estate Investing
One of the problems with investing in real estate is that it typically requires a high upfront capital investment. If you are looking to own a two-family home, get ready to put down $20,000 or more!
Fundrise is a real estate investing platform that has come up with an interesting solution to this problem. Thanks to modern-day technology, people from all over can pool their money together to invest in real estate projects. You can read our full review of Fundrise here.
There are a number of advantages to this. First of all, the minimum to get started is just $10 making the barriers to entry significantly lower. Second of all, you are investing in a diversified pool of real estate and not just one property.
If you own a two-family house and one of the units goes vacant, you just lost 50% of your rental income from the property. If you and 1,000 other people collectively own 10,000 units of real estate all over the world, one vacancy will not make a difference. That is the beauty of diversification.
Fundrise is a great investment option for earning compound interest!
Generate Compound Interest With Small Businesses
Investing in small businesses can be a tremendous way to build your compound interest.
But usually it comes with a significant amount of work to get started. Not anymore!
Thanks to platforms like Mainvest, you can invest in small businesses easily. With as little as $100, you can grow your income while helping small business owners grow their companies. Mainvest is completely free to join and there are no fees to invest. Create your account below to get started or check out my full Mainvest review here!
What Should I Do With This Information
Remember that compounding interest is a beautiful thing for investors, which should encourage you to invest as much as possible, so you can see your money multiply over time.
And look for ways to mitigate the negative impacts of compounding interest on your debt. Negotiating with your lender to lower your interest rate, paying more than the minimum or, better yet, paying your credit card bill in full every month are the best ways to do that.
This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.
Important Disclosures
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Compound Interest And The Time Value Of Money
The foundation behind compounding interest is the concept of the time value of money, which states that the value of money changes, depending upon when it is received. Having $100 today is preferable to receiving it a few years from now because you can invest it to generate dividends and interest income. Compounding allows that money to grow. If you waited two years to receive that $100, you’d miss out on two years of opportunity to earn compound interest. This is known as opportunity cost.
Opportunity cost is the loss of possible gains if an action is not chosen. In this case, the opportunity cost is equal to the amount of money you do not get in interest if you don’t invest in that money.
In our earlier example, if you don’t invest the $500 in an account with 10% annual interest, you’ll lose the opportunity to earn $50 or more per year in interest. In 10 years, your $500 could be $1,296.87. But if you don’t invest it, it’ll still be $500 10 years later.
How To Calculate Compound Interest Vs Simple Interest
As the name implies, simple interest is calculated in a simple way. All you have to do is multiply the original amount by the interest rate, to get the amount of interest paid per year. You then multiply this figure by the number of years the money is invested .
In practice, simple interest is rarely used in the world of investments. Compound interest is more favourable to investors, and works like this. The first year of interest is calculated as above: by multiplying the principle amount by the interest rate. So £100,000 at 4% interest will be £104,000 at the end of the first year.
Now this amount becomes the principle. In year 2, you multiply £104,000 by the same interest rate to get £108,160. Notice how in the first year you made £4,000 interest, but in the second year you made £4,160.
Carry on doing this for each year of investment, and youll see how the amount of interest increases year by year as the overall investment grows. After 10 years of this, youd be looking at a final balance of £148,024 and the final years interest would be £5,693.
For the curious, compound interest is worked out with the equation -x where x is the original amount, y is the interest rate and n is the number of years invested. But its much easier to think about it using the example above!
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How Much Money Can Compound Interest Make
Depending on your initial investment, you can generate thousands of dollars each month in compound interest.
Compounding interest takes time. The longer you let your money grow, the more money you will generate.
Take a look at this chart to see the true power of compound interest. Youll notice that the increase is small at first, but accelerates exponentially in later years. The accumulated interest in the later years is worth the entire portfolio at the beginning.
Depending on your financial goals, its possible to make millions annually in compound interest alone.
But remember, past performance is no guarantee of future results. You should only invest what you can afford to lose.
Need more help?
Let’s take an example to help you better understand how compound interest can help you get rich.
Let’s say you invest $10,000 into a a well-diversified index fund. Assuming a 7% annual interest rate, after the first year, your account would be worth $10,700. Not bad!
But where the magic really happens is after the first few years.
After the second year, your account value would be $11,449. Remember you only invested $10k meaning you’ve made $1,449 in interest alone.
After the third year, your account would be valued at $12,250. Youve now generated $2,250 in compound interest.
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How To Get Compound Interest To Accelerate Gains & Maximize Wealth Creation So You Can Accumulate The Money You Need In The Time You Have
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NOTE: This page is part of the Start Investing Guide. To go through the Guide in order, go here: Start Investing Guide
On this page I want to go over why compound interest is so important and how to get compound interest to accumulate the wealth you need in the time you have.
Understanding compound interest provides a deeper understanding of how I approach growing my wealth so I can secure my financial future. Harnessing the power of compound interest is at the core of my financial plan.
You see, I dont focus on just making money. My goal is to accumulate wealth to the point where I have lifelong financial security for myself and my family.
And quite frankly, reaching a level of financial security would not be possible at all if not for the power of compound interest.
As Albert Einstein said about compound interest, He who understands it, earns it. He who doesnt, pays it.
I want to earn it, so I have to understand it. And in understanding compound interest, the path to reach my long term financial goals is clear. Ill tell you exactly what I am doing so you can follow my lead.
As with everything on this site, I am not only talking about this topic in general terms but Ill be giving you insight into how compound interest fits into the Wealth Plan Blast Off .
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How To Get Compound Interest At An Accelerated Rate
Compound interest works because your invested money grows. And as your invested money grows your profit potential grows as well. Since you have more money invested, you can make more money even with the same percentage growth rate.
In the previous scenario we invested $1,000 and got 10% returns over 30 years. And the results were great. Keeping our money invested led to $16,449 in profits compared to only $3,000 in profits if we took out our gains every year.
But there is a way to accelerate this growth even more.
Remember, compound interest works because as your account grows, so does your profit potential and gains on your investment. So, lets help the account grow faster by adding $100 a month to your account.
Lets see what would have happened with this new scenario:
- Initial Investment: $1,000
Wow.
As you can see, growing your account balance by making even small consistent additions really pays off over time.
One great way to learn about the power of compound interest is to play around with a compound interest calculator. This is the one I used for the above calculations: Compound Interest Calculator.
What Is Compound Interest
Compound interest is the interest you earn on interest. In short, you make an initial investment and receive a particular rate of return your first year which then multiplies year over year depending on the interest rate received.
Lets say you make a $100 investment and receive a 7 percent rate of return in your first year. The interest has not yet compounded as you are in the beginning stage of the investment.
But then, during the second year you net another 7 percent return on that same investment. This means your original $100 grows as follows:
Year 1: $100 x 1.07 = $107
Year 2: $107 x 1.07 = $114.49
The $0.49 is compounded interest earned from the first to second year, as it is interest earned on top of the initial $7 in interest earned after the first year. The $7 gained in year one is simple interest. After this initial simple interest is gained, thats when the interest starts earning interest which is what is defined as compound interest.
This might not seem like a lot, but compound interest truly takes off in long-term investment accounts.
For the sake of the example, lets assume an account with a balance of $20,000 and an average return of 7 percent
Year 1: $20,000 x 1.07 = $21,400
Year 2: $21,400 x 1.07 = $22,898
In two years, you will have gained almost $3,000 with $98 compound interest simply by keeping it invested.
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Can Compound Interest Make You Rich
The answer to this question is yes. Compound interest can make you rich, but there are a few things you need to do to achieve this.
First, you need to start investing as early as possible, so the effects of compounding have more time to work in your favor. Investing in your 20s and 30s is an excellent idea and a decision that can seriously pay off down the road.
Remember, you dont have to invest a lot to get started. Every little bit counts.
Secondly, invest your money in investment vehicles that offer high returns, such as stocks and mutual funds. Investing like this can also help create passive income, especially if you earn dividend payments.
Take the time to learn about various funds and your options before choosing them. The more knowledge you have, the better.
Finally, resist the temptation to spend all of your hard-earned money. Budget, plan, save and invest regularly. Please pay attention to your money and track it as it grows through compounding.
If you can do these things over time, you will likely see your wealth grow, which will help you eventually reach financial freedom.
While it takes time to become wealthy through compound interest investments, it is possible with enough time and patience.
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What Is The Compound Annual Growth Rate
Because many investments do not pay a consistent interest rate, but are rather the average of a fluctuating market, the compound annual growth rate assumes compound growth over time to provide a projected rate of return.
This formula is the projected rate of return on an asset or investment, even if it does not explicitly pay compounded interest. The CAGR is a form of the compound interest formula, but rearranged algebraically to solve for the interest rate using the beginning balance, ending balance and number of periods.
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Simple Interest Earnings Over Five Years
Compound interest is where interest is paid in regular intervals, building on top of earlier interest paid. The result is a snowball effect of interest earning interest.
For example, , an initial investment of $10,000, earning 5% interest per annum with compound interest paid monthly, will give you $12,834 after five years. Thats because every month the interest earned was earning more interest.
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Compound Interest + Velocity Of Money = True Wealth Building
This is the most important section of this article on compound interest growth because it describes how your money can grow in your savings account and how that same money can also be utilized for other investments SIMULTANEOUSLY.
Mutual life insurance companies offer participating policies that pay you a guaranteed rate of return, plus potential dividends. You can borrow money from your account and use it for whatever you choose, such as to finance your own purchases, buying cash flow assets, whatever you choose.
Here is the magic. When you access the money in your cash account, you are actually taking out a life insurance loan by borrowing against the cash value in your policy. The cash value in your life insurance policy continues to grow, because it is still in there. It is still being credited with interest and potential dividends.
You now use your life insurance loan to purchase cash flow assets, such as real estate or other alternative investments like notes or bridge loans, what have you. Now you created cash flow and your life insurance policy cash value continues to grow at the same time as your new investment.
After you have set aside 6-9 months of emergency funds, consider placing your additional savings into cash value life insurance. Since the policys cash value grows tax deferred, your savings will experience true compound growth, at a rate much higher than your typical savings account at a bank.
I Opened A Cd That Compounds Daily
I also decided to tuck away a chunk of cash that I knew I didn’t need in a high-interest CD that compounded daily. I picked an 18-month term and with daily compounded interest, I was able to watch the amount of money I put in the CD grow faster than if it was sitting in my old savings account at a bank that wasn’t giving me much for my money.
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Pros And Cons Of Compounding
Though the miracle of compounding has led to the apocryphal story of Albert Einstein calling it the eighth wonder of the world or mans greatest invention, compounding can also work against consumers who have loans that carry very high interest rates, such as A credit card balance of $20,000 carried at an interest rate of 20% compounded monthly would result in a total compound interest of $4,388 over one year or about $365 per month.
On the positive side, compounding can work to your advantage when it comes to your investments and be a potent factor in wealth creation. Exponential growth from compounding interest is also important in mitigating wealth-eroding factors, such as increases in the cost of living, inflation, and reduced purchasing power.
Mutual funds offer one of the easiest ways for investors to reap the benefits of compound interest. Opting to reinvest dividends derived from the mutual fund results in purchasing more shares of the fund. More compound interest accumulates over time and the cycle of purchasing more shares will continue to help the investment in the fund grow in value.
Of course, earnings from compound interest are taxable, unless the money is in a tax-sheltered account. Its ordinarily taxed at the standard rate associated with your tax bracket and if the investments in the portfolio lose value, your balance can drop.
How Can I Tell If Interest Is Compounded
The Truth in Lending Act requires that lenders disclose loan terms to potential borrowers, including the total dollar amount of interest to be repaid over the life of the loan and whether interest accrues simply or is compounded.
Another method is to compare a loans interest rate to its annual percentage rate , which the TILA also requires lenders to disclose. The APR converts the finance charges of your loan, which include all interest and fees, to a simple interest rate. A substantial difference between the interest rate and APR means one or both of two scenarios: Your loan uses compound interest, or it includes hefty loan fees in addition to interest. Even when it comes to the same type of loan, the APR range can vary wildly among lenders depending on the financial institutions fees and other costs.
Youll note that the interest rate you are charged also depends on your credit. Loans offered to those with excellent credit carry significantly lower interest rates than those charged to borrowers with poor credit.
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