The Power of Compound Interest
Hello! It looks like we are live and ready to roll. This is the first time I’ve done this, and I wanted to start hosting more live sessions as a way to provide value to the community. Hopefully, everyone can hear me. I’m streaming on a couple of different platforms, so let me know if you have any questions as we go. Like I said, this is my first time doing this, but I’m hoping to do more in the future. You can send follow-up questions for future streams or topics, and I’d love to help.
My name is Phil. I’m a financial planner and the owner of a company called Foundation Wealth Planning. We typically work with Catholic families, especially those who are professionals, business owners, or medical professionals. These families often face added complexities—juggling family life, kids, and a growing career—and they want to ensure they’re optimizing their finances and growing their wealth in an appropriate way.
Today, I want to talk about a basic concept: compound interest. While this topic isn’t directly related to a Christian or biblical perspective, it’s a foundational concept in financial planning. It may be basic for some, but many people don’t think about it enough, even though it’s an incredibly powerful tool. With the market being volatile and questions about tariffs and investing strategies, the purpose of this session is to educate and motivate. Whether you’re a new investor or someone investing a lot already, understanding compound interest will remind you why staying invested—even during volatile times—is so important.
Let’s dive in. I’ll share my screen and walk you through a short presentation. Hopefully, it’s helpful.
The Power of Compound Interest
Albert Einstein allegedly called compound interest the "eighth wonder of the world." Let’s see if he was right.
First, let’s define compound interest. Unlike simple interest, where you earn a set amount based on your initial investment, compound interest allows you to earn interest on both the principal and any previously earned interest. For example, if you invest $1,000 and earn 5% interest, you’ll have $1,050 after the first year. With compound interest, in the second year, you’ll earn interest on $1,050, not just the original $1,000. Over time, this compounding effect becomes very powerful.
To illustrate this, let’s do a fun exercise. Would you rather have $5 million today or a penny that doubles in value every day for 30 days? At first glance, the $5 million seems like the obvious choice. But if you chose the penny, here’s what happens:
Day 1: You have $0.01.
Day 15: You still only have $163.84.
Day 25: Your total is $167,772.16—still far from $5 million.
Day 28: You’ve crossed the $1 million mark.
Day 30: You now have $5.3 million.
This example demonstrates the power of doubling and how compounding accelerates growth over time. The key takeaway is that compounding works best when you start early and let your money grow over a long period.
The Rule of 72
Now, you might wonder: "How long will it take for my money to double?" That’s where the Rule of 72 comes in. This simple formula estimates the time it takes for your investment to double. You divide 72 by your expected annual return.
For example, with a 7% annual return, your money will double approximately every 10 years (72 ÷ 7 = ~10). If you invest $20,000 at a 7% return, it will grow to $40,000 in about 10 years without adding any additional contributions. This shows how powerful even a modest rate of return can be over time.
Real-Life Example: Investing $7,000 Per Year
Let’s say you invest $7,000 per year in a Roth IRA from age 22 to 62, assuming an average 8% annual return. Over 40 years, your account would grow to approximately $1.8 million.
Here’s the breakdown:
Total contributions: $280,000 ($7,000 × 40 years).
Growth: $1.5 million comes from compound interest alone.
This is why starting early and investing consistently is so important. The earlier you start, the more doubling periods your money has to grow.
The Early Investment Advantage
To further illustrate this, let’s compare two hypothetical investors:
Investor A starts investing $7,000 per year from age 22 to 32 (10 years). After that, they stop contributing entirely.
Investor B starts at age 32 and invests $7,000 per year until age 62 (30 years).
At age 62, here’s how their accounts compare:
Investor A: After 10 years of contributions and no additional investments, their account grows to $1 million by age 62. They only invested $70,000 in total.
Investor B: Despite contributing for 30 years (a total of $210,000), their account only grows to $793,000.
Why does Investor A end up with more money despite contributing less? The answer is time. They had 10 extra years of compounding, which allowed their money to grow exponentially. This example highlights the importance of starting early. The sooner you begin investing, the more time your money has to double.
Key Takeaways
The power of compound interest lies in starting early, staying consistent, and remaining invested—even during turbulent times. Many people worry about market volatility, tariffs, or government decisions, but the key is to focus on the long term. By starting today, your future self will thank you.
Common Questions
Before I wrap up, I’ll address a couple of common questions I often get:
How do I invest in a Roth IRA?
A Roth IRA is not an investment itself—it’s a type of tax-advantaged account. After contributing, you need to choose investments, such as index funds, stocks, or bonds. The account grows tax-free, but the growth depends on how you invest the money inside it.What kind of returns can I expect?
While past performance isn’t a guarantee of future results, the U.S. stock market has historically averaged returns of about 7–8% annually. Your actual returns will depend on your investment choices, portfolio allocation, and how long you stay invested.
Conclusion
That concludes today’s live session. Thank you to everyone who stopped by! If you found this helpful, please follow me on social media or visit my website at foundationwealthplanning.com. I’m planning to host more live sessions in the coming weeks, covering different financial topics. Feel free to send me questions or topics you’d like me to address.
Thanks again for watching, and God bless!