Maximizing Long-Term Wealth: Compound Interest vs. Simple Interest

One of the most important concepts to understand as an investor is getting your money into a long term environment where you can earn the 8th wonder of the world, which is compounded interest. I’ve done analysis here just showing the difference between 9% compounded s and P 500 grid has done above 9% over the last 100 years. We’re using 9% just to be obviously conservative. A lot of people that want to live life by design have a seven or 8% growth rate simply because they want much lower risk and the ability to take money when they want safely. But today we’re comparing 9% compounded versus 16% simple interest. My now to hear is a lot of people are trying to do nontraditional things. Real estate syndicates are a good way where these big companies offer a height, maybe a ten, 1112, maybe 16% will guarantee you 16% of your money. Well, what’s not advertised is that simple interest they’re offering you. And so obviously it’s like, okay, well, this is safe, it’s a tangible asset. I put $100,000, I’m going to get $16,000 back over every year. Well, if that $16,000 goes back to your bank account, what’s it earning then? It’s not getting reinvested. It can be catastrophic long term to the growth of your wealth. So let’s just look at the numbers. So if you have $100,000 to start here, and the first column shows if you compound that growth at 9%. The second column shows if you compound that growth at 16%. So in the early years, five years, the 16% wins by 23,000. Even over ten years, the 16% wins by 14,000. Now, in 15 years, the compounded growth rate, despite being almost 7% less, almost half of what the simple interest, it catches up and never looks back. And if you look at 20 years out, hypothetically, you almost have double what you would have in a simple interest growth environment versus a compounded. And then long term, it’s not even close. You have 1.4 million, 1.47 million compared to 580,000. So again, if you’re trying to grow long term wealth, sometimes simplicity, investing in the market, indexing, asset allocating versus looking at these short term high deals that once you get the money back, it’s like, what do I do now? And if you add up all that, not only just the time, attention you have to do to get those, and then also realize long term, you’re going to be missing a ton of money versus if you had just kept things simple. And in a compound environment, this can be absolutely game changing for many people’s balance sheets and financial plans.