I am Dr.RandiBMD, your Board Certified Pediatrician and financial wellness expert. I provide your RX to wealth and financial well-being.
Would you like to know one of the keys to wealth building is?? It’s compounding interest! I cannot stress the importance of this concept. So, what is it? Compounded interest basically means that interest, based on an interest rate, is earned on your principle deposit and subsequently on the sum of prior period interest and the initial deposit or principle. I think the best way to explain this is by looking at examples. Once you see how this plays out, you’re almost amazed at how much money can be accumulated over time.
Say you received a $1,000 gift, and you decided to deposit that money into an account that has an interest rate of 8% that’s compounded annually. You decide to park that money into that account without any additional deposits. Your goal is to keep in this account for five years because you want to use it toward the purchase of a car. At the end of the first year, you will earn interest of $80. So, you now have $1,080. You did nothing additional. All you did was place $1,000 in this account. Let’s now see how it accumulates.
The next year, year number two, that 8% is not only going to earn money or interest on that $1,000, it’s also going to earn interest on the $80, which was the interest payment from the prior year, year number one. That amount is $86. Your total amount in that bank account at the end of year two is $1,166. Your goal was five years. After five years, you have almost $1,500 in this account. Your balance grew by almost 50% due to compounding. Therefore, saving is so important.
It’s so important to put money in an interest-bearing account and not in a mattress or in a drawer, because you can make money on money.
Now let’s look at a different example, with the same $1,000 deposit. You decide that you will make additional $50 deposits per month in the same interest-bearing account that compounds monthly not annually. Now look at how the numbers change – it is remarkable. The interest earned on that $1,000 plus the $600 that you contributed throughout the year is $105. Your total balance at the end of year one, is $1,705.
At the end of year five that $1,000, with the $50 monthly deposits over a 5-year period, comes to $5,163 – total contribution of $4,000 with interest of $1,163! That is an increase of your contribution of nearly 30%.So, you see the importance of savings. Let your money earn money. THAT’S how you build wealth! I am Dr.RandiBMD, your Board Certified Pediatrician and your financial wellness expert. I provide your RX to wealth and financial well-being. Please follow me at DrRandibMD.com and @DrRandibMD on IG, FB and Twitter. And download my free video – LEARN FIVE CREATIVE STEPS TO INCREASE INCOME at www.rxtowealth.com