272 | Understanding Compound Interest & Investing for Beginners

<div class= "elementor-element elementor-element-15da9379 elementor-widget elementor-widget-theme-post-content" data-id="15da9379" data-element_type="widget" data-widget_type= "theme-post-content.default"> <div class="elementor-widget-container"> <ul> <li>As the ChooseFI community continues to grow, it's necessary to discuss some fundamental basics that serve the audience who are just getting started, as well as provide a refresher for those who have been on the path for a long time. In this episode, we revisit the magic of compound interest and investing for beginners.</li> <li>Getting to financial independence where work becomes optional and your investments are producing enough income to live off of for the rest of your life is easier when you understand why saving and investing now is important.</li> <li>Kimberly asked a question in the ChooseFI Facebook group requesting help understanding compound interest and the basic principles of a compound interest account.</li> <li>Investopedia states that interest may either be simple or compounded. Simple interest is based on the principal amount. In contrast, compound interest is based on the principal amount plus the interest that accumulates on it every period.</li> <li>For example, in a simple interest calculation, a deposit of $1,000 earning 10% interest each year would earn $100 in the first year, resulting in a balance of $1,100 in year one, $1,200 in year two, and $1,300 in year three. In a simple interest calculation, the interest percentage is not applied to the interest earned beyond the initial principal.</li> <li>The real world, however, works on compound interest, which is based on the principal amount and the interest that has accumulated.</li> <li>Using the same example of $1,000 in principal and 10% interest, after the first year, the balance is the same at $1,100, but in year two, interest is calculated on the new balance, resulting in $110 of interest and a new balance of $1,210 going into year 3. It starts small in the early years but really ramps