Money matters. I wish that I knew tall when I was an investor, a business owner and a money educator, understand it better compound international budget investment to recover from debt. No one explained to me that your money to align us at work is about normalizing the conversation. I Hey everybody. It's Sarah Poynton here. I am an investor, business owner and money educator, and today we are talking about compound interest. Welcome to the Money Mechanics podcast. So this episode, I'm I don't understand why we are not taught about compound interest when we are at school. It's one of those things that it's called the eighth wonder of the world. Albert Einstein said, those who understand it earn it. Those who don't understand it pay it. It is such a simple thing to understand, and yet most people don't really know what it is and how, most importantly, how you can benefit from it yourself. As a normal, everyday person, you guys will know about credit cards, and what happens with credit cards, quite often, is that you will be paying a compounded interest of some sort, which is what's making the punks rich. So what I'm going to talk to you about today is what that compound interest actually is, and how you can benefit to become rich from it, instead of helping the banks become rich because you're paying it right? I'm going to ask you a question, and I want you to ponder this question, what would you prefer? Would you prefer a bag of cash, million pound today, I've got a million pound. I give it to you. You walk away. No questions asked. Or would you prefer one pound today that doubles every day for 30 days, and you walk away with whatever that total is, bag of cash. No question is asked. Which one of those do you think you would prefer? So before I learned about money, I definitely would have picked the million pound cash today, because I would have assumed that that's more money. But actually, I'm gonna give you some proper numbers on this, so that you have exact 1 million pound cash today is 1 million pounds, right? If you were to take a pound a day, and it doubled every day for just 30 days. At the end of that 30 days, the money that you've accrued is 1 billion with a B, billion, 73,741,821 pounds, and some change, it's a lot of money, right? And I definitely would have picked the million pound cash, because I never would have thought about that being such a big difference. That's the power of compound interest at work. That is exactly what we're talking about here. So compound interest is where you earn interest on your interest. There's two different types of interest. There's simple interest and there's compounded interest. Simple Interest is where you earn interest on your initial capital only. So let's say that you had a we'll assume a couple of things here, right? So assume we've got 10,000 pounds, and assume that we're investing it at 5% simple interest. Well, that basically means is, you take your 10,000 pounds after 12 months, you would have earned 5% which is 50 pounds after five years, you would have earned 5% you would have 12,500 and the same 10,000 after 20 years, you would have 20,000 pounds, right? That's at 5% so it's 5% of that initial capital, which just adds every year the same amount. Now, the difference between simple interest and compound interest is that if you took that same 10,000 pounds, you invested it at the same 5% level. And let's be honest, 5% actually not that difficult to access in the market. So things like the S, p5, 100, the FTSE 100 index funds, there's dividend funds, most of which generate more than 5% annually as an as a interest rate, right, or as an income level. So let's assume 10,000 pounds for five years, compounded over at 5% the end of five years, you've got 12,833 pound of 59 pence, which is 333 pounds and 59 pence more after five years than the simple interest calculation, which you might be thinking, well, 300 pound is not a big difference, but it's free money, right? Why would we sniff at that? But where compound interest becomes super sexy is the longer you leave it. If you took the same 10,000 you invest it at 5% after 20 years, you would have 27,126 pounds and 40 pence with the simple interest calculation, you had 20 grand. With the compound interest calculation, at the same interest rate, you've got an extra 7126 pound and 40 pence for doing nothing. Why don't we utilize this more? It's because no one really talks about it. No one's really told us about it, no one's really explained to us what it is, how we can benefit from it, and where we can get it right. So in the book, I talk about this a lot, and if you want the link to get a copy of the book, if you haven't got it yet, we'll make sure it's with the show notes. This is like life changing money, because you don't actually have to do anything for it, you're going to be if you want to save money anyway, you just put it into a different place, and you benefit from compounded interest. You just it's about the selection of where you're putting your money. I'm going to give you a couple of scenarios now, and they're actually from the book. I'm going to share them with you. Can get a copy of the book and dig deep into these, but I'm going to give you some numbers, because I want you to understand the differences and how important this stuff could be, especially for those of you who have got kids, who, you know, have got nieces and nephews, are trying to build a legacy for people. Those of you that are young, who are trying to take, you know, trying to build your futures, it's important that you guys all take advantage of compound interest, because it's there for you to benefit from. People just aren't so Okay, so I'm going to give you a scenario, and again, this is in the book. You can dive deep into it in the book, but I'm going to summarize it for you, because I think it'd be really helpful to you to just better understand this. What we're talking about with compound interest is the ability to build a legacy. It's ability to help out the future generation. So if you've got kids, or you're an auntie, an uncle, nieces, nephews, those sorts of things. Then this, these scenarios are going to really ring true with you when a child's born, right? Most children, not all, but most get some sort of gift, maybe clothes, maybe a teddy bear, maybe books, you know, cute stuff, baby stuff. Usually, every family's on a slightly different budget, but usually there's that sort of contribution to their life at the very early stages. Then all kids have, let's say they, let's say we're talking till they're 25 they have 25 birthdays, 25 Easters, 25 Christmases, right? So from the day they're born to the day they turn 25 if you were to take 25 pounds to be siphoned off. And again, you can talk to your family members, and you say, Do you know what? Don't spend 25 quid on a noisy drum set or, you know, a shit present or stuff that's going to clutter up the place. Put 25 pounds into an investment pot for this human talk to your family members, talk to friends, etc. Make sure that you're transparent with it. If you can take 25 pounds instead of gifts, what we've got is 25 pound on day one, and then you've got 25 birthdays, 625, quid. You've got 25 Christmases, another 625, quid. You've got 25 Easters, another 625, pound, and you've got a total of 1900 pounds, right? That's the pot that you've built. Now, if you were to put that into a savings account for them, most savings accounts at the moment, the interest rates are not very good. They're low, right? And they're definitely not beating inflation at all. They're super low. So let's say you do that on their 25th birthday, you're probably going to be able to give them roughly 1900 pounds. It might be slightly higher, but it won't be a lot higher. That's on a basic savings account. But what if instead, you took that 25 quid on day one that Welcome to the world present, and you took their 75 pounds three times a year for 25 years, and you invested it at 10% with compounded interest over time, on their 25th birthday, instead of 1900 pounds, you'd be able to give them 8220 pounds. That's a big difference. And I know on my 25th birthday, if someone had given me eight grand, I would have been able to buy a car or clear my student loan or, you know, go travel in or do something that would have required money. The problem is that most people are saving money, but that money being put into a savings account is in fact, eroding in value because inflation and interest rates aren't working for us. When you put it into a investment pot and it's earning money on its interest, it grows rapidly. Now this is all talked about page 160 364 and 65 of the book. There's another scenario that I want to talk to you about. What if you want to give your kids a million pounds on their 35th birthday? Now I don't know about you, but when I was 35 I was doing super adult stuff. I was paying mortgages. I was, you know, building businesses. I was doing lots of stuff that took a lot of money. Most people are having children, putting kids into school, you know, paying for holidays, like living a life that actually where money is tight. So what if you know your 25 year old? You don't want to hand your 25 year old a million quid? Because actually, they'd probably just buy a fast car and wrap it around a lamp post. That's probably what I would have done. I've would have done, I think, with a million pound on my 25th birthday, on my 35th birthday, I was a different human being. And actually a million pound when I turned 35 life would be very different than what it is right now. So I'm 40 now, and if I'd have got a million quid five years ago, I would be in a very, very different situation. You can do that for your children. You can do that for the people in your lives. Now, compound interest is how we do that, but you have to use time as the key ingredient. You have to start and use time to build up and build up and build up. So let me give you the scenario. So you want to give your kids a million pound on their 35th birthday, what you need to do is take 1000 pounds as a starting point. Now I get it. Getting 1000 pound together is really hard for some people, and set yourself that target. We talk a little bit more in the podcast about setting financial goals and getting yourselves to them, but get to that 1000 pound pot once you've got to that if you were to invest 1000 pounds at 10% per year, and you were to add 254 pounds and 80 pence per month. So again, 254, pound a month is a lot of money to some people, but these are the numbers you can work out how you can get there, right? 254, pounds and 80 pence per month for 35 years, invested at 10% you will have physically put in 108,016 pounds, but you will have earned 892,006 pounds and three pence. So you now have invested 254 pound a month with an initial capital investment of 1000 pound, and you now have a pot worth over a million quid to hand to your children, if you want to on their 35th birthday. Now, you totally do this for yourself right now. Not everybody's got 35 years. You know, some of you watching this will be in your 50s, in your 60s, in your 70s, even time's not necessarily on our side the older that we get. But we absolutely can benefit from compound interest by starting as soon as we possibly can. Now we're talking about these scenarios, but there's loads of different scenarios. The point I want you to take away from this is that actually compound interest is so incredibly powerful that you must take advantage of it. You must spend the time understanding it. And honestly, this is why I wrote the book, right? It's why I decided that we have to spread the word about this stuff. Because if I'd been taught this even when I was at school, I could have set this up when I was 18. Now I'm 40. Could have been just ticking along in the background. I'd have a huge investment pot now available to do whatever I wanted with. I could take an income from it. I could be I could sell all my assets and buy other things. You know, I could have bought businesses. I could have done all sorts. If we don't know about this, then what do we do? So on page 174 in the book, there's actually a link to a compound interest calculator, and what that will allow you to do, you can just go and download that for free. What that will allow you to do is to punch in your numbers the target you're trying to get to. So let's say you're trying to get to a million pound in 35 years. Punch in the numbers, put in your timeline, and it will tell you how much you need to invest at what interest rate to be able to achieve the goal that you've set. It's so important that you guys spend some time learning this stuff, because without it, we've just got to rely on banks savings rates. And let's be honest, the banks don't necessarily want us to make more money than they're making. We know that, right? But this is you benefiting from the same thing that the banks are benefiting from. It's a way of you hacking a system and actually becoming wealthy in the process. So that's it. On compound interest, it is quite a big topic, and actually, you know, there's real clear formulas for you to work this out. They're not, I mean, they're not that clear. Actually, they're very complicated formulas. I'm not going to pretend like I know what the formulas are, because I don't. They're in the book. If you want to learn them, you totally can go nerd out. It's absolutely fine. But if you're like me, and you just like a quick calculation, then the interest, the compound interest calculator that's in the book that you can download for free is a super quick way of you doing it. If you've got any questions on this at all, make sure you join the Money Mechanics Facebook group. Make sure that you comment on this. If you want any help from me at all, get in touch with me. DM me, whatever it is, and I will make sure that I answer these for you. Thank you so much for tuning in today. Hopefully you've enjoyed this episode, and it's got your brains thinking about how you can position your financial future and the financial future of your kids and your family and so on. If you're over on YouTube watching, make sure you drop us a comment. Hit Like and subscribe to the channel. And if you're listening on podcasts, make sure you leave us a five star review. Spread the word. Help us. Spread the Love. This is the Money Mechanics podcast. Thanks for listening. You.