Warren Buffett is 88 years old and earned 90% of his $83 BILLION Net-Worth over the last 28 years. How did he achieve this remarkable feat? COMPOUND INTEREST.

• At 60 years old, Mr. Buffett was worth ~$3.8 BILLION!
• By the time he was 66 years old, his net worth grew to ~$16.5 BILLION!. 
• At 72 years old he was at a mouth dropping, $35.7 BILLION!
• In his 80’s as of mid-August 2015, Mr. Buffett’s net worth was  ~$67 BILLION!
• As of today, June 3, 2019, Mr Buffett is worth around $83 BILLION!
• And by the way, he has pledged to give ALL his Berkshire Hathaway stock (which is over 99% of his wealth) to charity, having already donated over $3.4 billion.

 In large part the above extraordinary growth is due to a tool we are all free to use – THE MAGIC POWER OF COMPOUND INTEREST. The good news, it boils down to at most 6th grade math. If you read nothing else on my blog – this is the key to building your wealth!  With the exception of beating the odds and picking this week’s $444 million Mega Millions or $350 million Powerball jackpot, compound interest is the best way to grow your HARD EARNED MONEY into wealth.  {The odds of winning the Powerball jackpot are 1 in 292,201,338. That’s a bit better than your odds of winning the Mega Millions jackpot, which stand at 1 in 302,575,350, according to the New York State Lottery. The overall odds of winning any Powerball prize are 1 in 24.87.}

LET’S BREAK THIS MAGIC OF COMPOUND INTEREST DOWN

Compound interest accumulates  when you earn interest on both the money you have saved AND the interest you earned on that money.

Let’s look at a few examples:

Example 1:  Young good looking Physical Therapist, Jake, starts saving at age 25 and stops when he retires at 60 years of age:

JAKE’S SAVINGS

• Opens Investment Account: $1,000
• Save: $100 per month
• Time: 35 years or 420 Months
• Start saving at 25 years old and stop at 60 years of age. 
• Interest rate: Seven (7) Percent {Invests in S&P 500 ETF}
• Total Invested with YOUR HARD EARNED MONEY: $43,000
• MAGIC OF COPMPOUND INTEREST: $149,662
• Total Saved: $192,662

Example 2: Young good looking Physician, Candace, starts saving at age 25 and stops when she retires at 60 years of age:

CANDACE’S SAVINGS

• Opens Investment Account: $1,000
• Save: $1,250 per month
• Time: 35 years or 420 Months
• Interest rate: Seven (7) Percent {Invests in S&P 500 ETF}
• Total Invested with YOUR HARD EARNED MONEY: $526,000
• MAGIC OF COPMPOUND INTEREST: $1,749,957
• Total Saved: $2,275,975

Example 3: Young good looking Chemical Engineer, Jacqui, starts saving at age 25 and stops when she retires at 60 years of age:

JACQUI’S SAVINGS

• Opens Investment Account: $1,000
• Save: $2,000 per month
• Time: 35 years or 420 Months
• Interest rate: Seven (7) Percent {Invests in S&P 500 ETF}
• Total Invested with YOUR HARD EARNED MONEY: $841,000
• MAGIC OF COPMPOUND INTEREST: $2,793,627
• Total Saved: $3,634,677

The above three examples demonstrate the power of compound interest, letting your HARD EARNED MONEY work harder than you. In each example, your interest earned off your monthly deposit exceeds your deposits by a factor of more than three!  This is how Warren Buffett grew his single digit billions into double digit billions and will most likely hit triple digits. 

THE IMPORTANCE OF STARTING EARLY

The above chart shows your net worth due to compounding if you start investing at 25, 30, 35,…55 years of age.  LESSON: The earlier you start saving the more wealth you create.

CONCLUSION

YOU NEED THREE INGREDIENTS TO BUILD WEALTH:

1. SAVINGS – Spend less than you earn and invest the remainder.
2. TIME – The younger you start the more you can save.
3. COMPOUNDING – Your savings grows along with the returns on your money.

COMPOUND INTEREST EXPLAINED IN ONE MINUTE

https://youtu.be/jTW777ENc3c

For you serious math geeks and nerds who want to truly under the power of compounding, here are two longer more technical videos. 

https://www.khanacademy.org/video/introduction-to-compound-interest

https://www.khanacademy.org/video/the-rule-of-72-for-compound-interest

For those of you still pondering how did Warren Buffett grow his net-worth to $83 Billion, it is because he achieved far greater than average S&P 500 annual returns. Mr. Buffett, one of the best stock and company investors of all time, consistently beat the S&P 500 Index.  See below charts:

1965-2018 –  Berkshire Hathaway Annual Returns Compared to S&P 500

The good news- we do not have to be as good as Warren Buffett.  If we simply achieve the average S&P 500 Index returns, by investing in the S&P 500 ETF Index, YOU CAN ACHIEVE YOUR WEALTH GOALS! 

What are you waiting for – LET’S GET STARTED!

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DISCLAIMER

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.  

I started my first business at ~13 years of age.  I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOTa licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or financial advisors.