S01_E06 - Understanding Compound Interest

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There was once a king who was to pay a farmer for his work. He asked how much he'd like to get paid. The farmer replied saying, place two coins on the first square of the chess board. Then double the number of coins when you go from one square to the next.

First there was 2, then 4, then 8 and so on. Can you guess how many coins there are by the time he reaches the end of the chess board?

Before I get on with this episode, a reminder that I have a Patreon page where you can read articles, download spreadsheets, get internet resources, watch tutorial videos and even chat with me. It's free to join so sign up today. The link is:

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Also, a disclaimer, that I am not a financial advisor, please consult with a professional before making any financial decisions. On with the episode.

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The article explains compound growth, a key concept in investing where money earns more money, eventually outpacing expenses and leading to financial freedom. This can be achieved through various investment avenues like stocks, index funds, real estate, or business ownership.

The concept is similar to how credit card interest works. If only minimal payments are made, the interest accumulates, leading to an ever-increasing debt. This compounding effect can turn a small debt into a large one over time, illustrating how banks make money and the dangers of credit card debt.

The article then applies this concept to investing. For instance, investing in a company like Apple allows the investor to benefit from the company's growth, which in turn increases the investment's value. The goal for long-term investors is to have investments that grow more than their annual expenses.

An example is provided to illustrate this: investing $1M in stocks that grow by 10% annually. By withdrawing $100k each year, the investor maintains the principal amount while benefiting from the growth.

The article emphasizes the power of compound growth and how even a small change in the growth rate can significantly impact the investment's final value. It also highlights the importance of choosing the right investment vehicles, like superannuation funds with minimal fees, as small differences can lead to substantial gains or losses over time.

Finally, the article promises to explore further topics like investment choices, risk assessment, and the role of age in investment strategies in future discussions.