How to become a millionaire with just 150$ a month. Compound Interest.

The concept of compound interest has been around a while. Albert Einstein is believed to have called it "the eighth wonder of the world."

Of course, as you can imagine, if you’re borrowing money, compounding works against you and in favor of your lender instead. You pay interest on the money you’ve borrowed; the following month, if you haven't paid, you owe interest on the amount you borrowed plus the interest you accrued.

Lets take 3 different persons at age 20 and see how their wealth would be growing by time. John, Mark and Alice. Their balance is updated monthly. All of them had put initially 1.000$ on their own account.

John put his money to grow at 7% per year. 7% per year can be achieved on stock market for example index fund S&P500. John’s future accumulated balance in 30 years will be $8.119(total principal put by John $1.000, total interest gained $7.119). The amount here grew 7 times. If John decides to make his living only on the interest gained from the accumulated amount. It will be $47 monthly which he can spend on his living.

Mark put his money to grow at same 7% per year. And instead of having coffee for 5$ a day at Starbucks he contributed those money to his account as a sum of 150$ each month. His future balance in 30 years will be $192.210 (total principal put by Mark $55.000, total interest gained $137.210). If Mark decides to make living only on the interest gained from the accumulated amount. It would be $1.120 of passive income monthly that Mark can spend on his living.

Alice instead managed to put her money to grow at 20%per year (the one Warren Buffet has in average on his capital). She also made monthly contributions of 150$ to her account instead of buying a coffee from Starbucks. Her future balance in 30 years will be $3.890.228 (total principal put by Alice $55.000, total interest earned $3.835.228).

Now if Alice would decide to make living only on the interest gained from the amount accumulated. How much money it would be? It would be $64.837 of passive income monthly she can spend on her living. Assuming she is able to continue having interest as 20% per year.

Now you can see exactly that time, contribution and interest rate are crucial for the future capital. Also keep in mind that the currency itself is also very important. Inflation will decrease the money value after certain period of time.

Venezuela for example, in 2018 had an inflation rate of 80.000%. It means 80.000 Venezualian bolivars decreased in value to 1 Venezuelian Bolivar in just one year. The central bank in Venezuela had not been able to print currencies fast enough to keep up with inflation. And government could not afford even the paper costs.

What Makes Compound Interest Powerful?
Compounding happens when interest is paid repeatedly. The first one or two cycles are not especially impressive, but things start to pick up after you add interest over and over again.

Frequency: The frequency of compounding matters. More frequent compounding periods—monthly instead of yearly, for example—have more dramatic results.

Time: Compounding is more dramatic over long periods. Again, you’ve got a higher number of calculations or “credits” to the account when money is left alone to grow.

Interest rate: The interest rate is also an important factor in your account balance over time. Higher rates mean an account will grow faster. But compound interest can overcome a higher rate. E
Deposits: Withdrawals and deposits can also affect your account balance. Letting your money grow or regularly adding new deposits to your account works best. If you withdraw your earnings, you dampen the effect of compounding.

Starting amount: The amount of money you start with does not affect compounding. Whether you start with $100 or $1 million, compounding works the same way. The earnings seem bigger when you start with a large deposit, but you aren’t penalized for starting small or keeping accounts separate. It’s best to focus on percentages and time when planning for your future: What rate will you earn, and for how long? T

Rule of 72
The Rule of 72 is another way to make estimates about compound interest quickly. This rule of thumb tells you what it takes to double your money, looking at the rate you earn .

Scenario 1: You have $1,000 in savings earning 5% APY(annual percentage yield). How long will it take until you have $2,000 in your account?

To find the answer, figure out how to get to 72. Since 72 divided by 5 is 14.4, it will take about 14.4 years to double your money.

Scenario 2: You have $1,000 now, and you’ll need $2,000 in 4 years. What rate must you earn to double your money?

Again, figure out what it takes to get to 72 using the information you have (the number of years). Since 72 divided by 18 equals 4, you’ll need to earn approximately 18% APY(annual percentage yield) to reach your goal.

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