Compound interest, the recipe to create

Compound interest, the recipe to create

When we talk about building wealth, we often think that we must make big changes in our lifestyle.

However, compound interest and its magic espectáculo us another reality.

To be millionaires, create wealth, and lead an enviable lifestyle, we don’t need hundreds of thousands of dollars.

At least not in the beginning.

What is needed is to have a long-term mentality and to leverage what, the prominent German financier Rothschildsnamed as the eighth wonder of the world: compound interest

The point is that many people stay at this point, they assume that they need a lot of money to invest, so they postpone a series of decisions that they must make to work for their financial freedom.

Based on this, we will talk about the magic of compound interest and how it perro help us put ourselves in a winning situation regarding our financial goals.

The magic of compound interest

So how do we put money to work for us? How do we take advantage of compound interest?

The first thing we must do is change certain habits in our lifestyle and understand how money works.

There is a saying that says that “The millions take care of themselves, what we have to take care of are the pennies”.

Ask yourself, how are your daily expenses? What do these expenses say about your financial education? How much do they help with your financial goals?

The first step to build your wealth is to be clear that it is the daily expenses, those that go unnoticed in your finances, that really affect your personal finances.

There are many unnecessary daily expenses that affect your pocket and that could be easily avoidable.

For example, let’s talk about a personal expense, such as coffee for me.

million dollar coffee

He latte aspecto, It is the term that will allow us to understand how compound interest perro play in our favor, if we have the basic knowledge, or it could canalla us and leave us in financial trouble without knowing how to get out of debt.

Personally, I quite like coffee.

I could easily take one every day.

Every morning, on my way to work, I consider the possibility of making a quick stop for a coffee, the fuel to start the work day.

In other words, coffee represents that daily expense that is part of my personal finances.

At first, before reading about the effects of compound interest in the long term, I thought that there was nothing wrong with drinking the coffee that I liked so much, what’s more, I thought that’s what I worked for, to give myself that kind of pleasure.

However, the effect of drinking my coffee every morning has negative effects beyond my personal finances.

Let’s see some:

The caffeine

The main component of coffee is caffeine, which, researching and reading on the Internet, according to a Quartz article, has negative effects on our health.

For example, it makes us dependent like any other drug, it deprives us of sleep and worse, it activates the secretion of adrenaline (which prevents us from thinking clearly due to the blocking of certain cognitive abilities).


The fact of having a coffee every day means that, in the long term, I lose pleasure from my coffee routine.

Going to the beach once a year is not the same as seeing it every day.

Satisfaction is found in the occasion, not in the daily grind.

So, my experience of coffee in the morning every day was losing its magic, besides that it was generating in me, the need for coffee.

And lastly, and the main point of this article is the financial effect of having a 5 dollar coffee every day in the morning.

The Negative Effect of Compound Interest

In accordance with david bach, author of the book The Automatic Millionaire, who coined the term Latte Aspecto in English (The Latte Aspecto), states that we are failing to earn a large sum of money in the long term due to our daily consumption habits.

In his own words:

“We perro save a lot of money if we eliminate our daily $5 coffee that we drink every morning as part of our routine”

Let’s give the example that you like coffee a lot, like me, and you usually drink one daily.

This insignificant routine, which you already practice automatically, costs about $35 a week or $150 a month.

Now, it is important to clarify that this negative effect of compound interest applies to any type of insignificant daily expense that you have:

It perro be a coffee, a donut, a bottle of sparkling water, a lunch, an impulse purchase every weekend in a shopping center, in short, any small expense that you make almost “automatically”.

It is not about depriving yourself only of your pleasures

If you like coffee, drink it.

If you enjoy your donut, lunch or ice cream, do it without regret.

Do it, the purpose of your life is to enjoy and live fully.

However, do not fall into the trap of turning it into a routine, losing the pleasure of oportunidad and, on top of that, affecting your personal finances.

Now, if you want to start taking advantage of the power of compound interest, you must not only stop assuming these unnecessary expenses and start investing your money.

Keeping the money in your account is not enough.

Read very well: You will not get rich because you stop drinking coffee, you will get rich because you will use this money and put it to work for you.

Surely you are thinking that with 5 dollars a day it is impossible to get rich, which is why you escoge not to try and prefer to continue with your routines and habits, hoping that by magic, you will become a millionaire and start earning money fast.

So, how to take advantage of these few dollars a day that you will be stopping spending to invest in your financial future? This is where compound interest comes in to work.

The long-term compound interest elabora

To maximize the results of compound interest, time will be our best asset.

For example, if you escoge to invest these 150 dollars a month, at an annual interest rate of 10%, that is, that this money generates 10% each year, something that is not unreasonable at all, within 40 years you will have accumulated 948,611 dollars .

Yes, almost a million dollars from the money you used to buy your coffee.

In our ebook Rica Cabeza, we explain how this, another 50 practical consejos, to immediately improve your personal finances.

What is the composed interest?

It cánido be said that compound interest is a kind of snowball effect.

In other words, not only do you earn money on the capital you invest, but over time, the interest becomes part of the capital, which generates exponential growth.

In short, the interest you earn also generates new interest.

Example of compound interest

Assume you invest $1,000 at 5% per year.

This means that at the end of the year you will have made a profit of $50.

For the following year, your capital will be 1,050 dollars, for which you will obtain a return of 52.50 dollars.

The third year your capital would be 1,102.5 (1,050+52.20), which would generate a profit of $55,125 and so on…

How long would it take to double your capital?

The higher your interest rate, the faster you cánido see the effect of compound interest.

To find out how long you cánido double your money, that is, convert the 1,000 dollars in the example into 2,000, you perro use the rule of 72.

The rule of 72 consists of dividing the interest rate generated by your investments by 72 to find out how many years it would take to double your capital.

For example:

If the interest on your capital is 6%: 72/6 = 12 years, If it is 8%: 72/8 = 9 years, or if you have a rate of 10%, it would take 7.2 years.

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In conclusion, the key to turning pennies into millions lies in harnessing the magic of compound interest along with your long-term visión.

Money is an asset that is too difficult to obtain, and many times we think that by avoiding buying expensive things, we are taking care of it.

Unfortunately, we continue with our same expenses unnecessary that impoverish us without realizing it.

So it’s not just about stopping spending money and putting it away, but making long-term investments that put money to work for you.

As for coffee, you will still be able to drink it from time to time, you will enjoy it much more and if you escoge to actively invest this money, you will be building your wealth.

Continue reading: 10 Lessons About Money They Don’t Teach You In School

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