Compound Interest is one of the MOST powerful tools in wealth creation & retirement planning. Albert Einstein once said “Compound Interest is the 8th Wonder of the World”. Warren Buffet is also known for crediting Compound Interest for big part of his success. Is Compound Interest or Passive Investing right for you and your investing strategy, answer the following questions:
- Are you currently building to replace your income or building for retirement?
- How many years do you have left in your working career?
- What is your time horizon (time you are in a deal) ?
- What is your target Internal Rate of Return (IRR) annually?
- What’s your PIG (Passive Income Goal)?
- Do you prefer Excel or Google Sheets?
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Compound Interest is great for building your retirement account, long as you a runway of at least 5 years of time. Compound interest isn’t exciting after year 1 or 2 but gets very exciting after 5 or 10 years. If you seeking interest annually to replace income, compound interest may not be best idea for you right now. I’d wait for a better time once you’ve replaced your income. When investing with compound interest, you must determine your PIG. Your PIG is your Passive Income Goal is how much you want to earn monthly or annually for your investments in 5 or 10 years.
Let’s say for example your PIG is $10,000 per month ($120K per year)
- PIG Example: $10,000 per month / $120,000
- $1,000,000 invested at 12% will net you $120,000 per year
- What if you don’t have $1M to invest? Start where you are, see $100K example below.
- Day $100,000 to Invest at 12% Interest Compounded Annually for 5 or 10 years
- End of Year 1- $100,000 x 12% = $12,000 interest (Cash basis now $112,000)
- End of Year 2- $112,000 x 12% = $13,440 interest (Cash basis now $125,440)
- End of Year 3- $125,440 x 12% = $15,052.80 interest (Cash basis now $140,492.8)
- End of Year 4- $140,492.8 x 12% = $16,859.14 interest (Cash basis now $157,351.94)
- End of Year 5- $157,351.94 x 12% = $18,882.23 interest (Cash basis now $176,234.17)
- 5 Year TOTAL— $76,234.16 Interest Divided by Original Principal $100,000 = 76% divided by 5 years = 15.2% IRR Target
- End of Year 6— $176,234.17 x 12% = $21,148.10 interest (Cash basis now $197,382.27)
- End of Year 7- $197,382.27 x 12% = $23,685.87 interest (Cash basis now $221,068.14)
- End of Year 8- $221,068.14 x 12% = $26,528.18 interest (Cash basis now $247,596.32)
- End of Year 9- $247,596.32 x 12% = $29,711.56 interest (Cash basis now $277,207.88)
- End of Year 10- $277,307.84 x 12% = $33,276.95 interest (Cash basis now $310,584.82)
- 10 Year TOTAL- $210,484.78 Interest Divided by Original Principal $100,000 = 210.48% divided by 10 years = 21% IRR Target
In Summary, 12% Compound Interest Annually results in a 15.2% IRR over 5 years or a 21% IRR over 10 years. In 5 years you Nearly Double your original principal and Triple it in 10 years. Now that example is just investing with $100,000. If you want to get to $1M investable, you’ll need to invest approximately $350,000 for 10 years to reach $1M then you can move from Passive Income to Active Income taking the interest of $1M monthly to hit your $10K per month PIG. Happy Investing!
Compound Interest is POWERFUL, especially when combined with cash value whole life insurance. Passive investors can participate in longer runway deals such as commercial asset classes development deals with proven recession resistant performance. Hope this adds another weapon to your investing arsenal.
Would you like an Excel Doc or Google Sheets to Calculate YOUR Compound Interest IRR?
Please NOTE: Only Edit the YELLOW boxes— Amount Invested and Interest Rate. If Google Sheets, Make a Copy & Edit Away
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this is great information and very clear understanding how to money works.
You are welcome! Once I learned it, my mind was blown that this isn’t taught in schools. Another post I’d do in the future is a breakdown of a 30 year mortgage. Any other topics you or everyone else would like to chat about? Have a great day! My cell is 815 790 2330, happy to text or chat with anyone.