When it comes to creating wealth and carving out a path to financial independence, few things are more effective than the power of compound interest. We have spoken in great detail about how compound interest in an investment portfolio could potentially produce hundreds of thousands of dollars more than the measly APY of a savings account. To get a visual of the impact of compounding interest, you could use any of the compound interest calculators out there. But to truly understand how compound interest can impact your net worth, you need a compound interest calculator where you can also incorporate your future financial goals. This will allow you to watch your income, interest, and net worth grow as a ratio to your debts such as mortgage, auto, or student loans.
Below, we will review how compound interest works and then take a look at it in action by using a compound interest calculator that actually fits your financial goals.
Compound interest is the idea that any interest you earn on your investment is not only earned on your original investment but also on top of any interest you have already earned, hence the term “compound.” The compound interest you earn on an investment now becomes interest on top of interest, and this phenomenon becomes very impactful over the course of many years.
A typical rate of return on a low-risk, investment portfolio may be 6% or 7%. This may sound small but looks what happens when you compare a 7% compound interest return with a .04% APY of a savings account (which is the current national average). If you just left $20,000 in a savings account that earned .04% APY over 30 years, you would have a total return of $256.70.
However, if you left $20,000 in an investment portfolio that earned 7% compound interest over the same 30 years, you would have a total return of $137,000.
Pretty significant difference.
You can use a compound interest investment calculator to play around and see what your return would be with different time periods and rates of return. However, these projections are purely mathematical and don’t really give you an accurate picture of what your net worth would be.
Investing a percentage of your income into a compounding interest portfolio is one of the smartest things you can do with your money now, but as you get closer to retirement, it’s crucial that you have a clear picture of what your net worth will be by age.
As, we mentioned, your net worth is the total amount of your assets minus your liabilities. So, if you project out the return of your investments using a compound interest calculator, you also need to include your future financial goals along the way. These could be buying a home, car, or going back to school.
When you are able to add in your future goals and liabilities, you get a better picture of what your net worth will be at retirement. And this is a lot more effective than just using a compound interest calculator.
At Wealthplicity, we have developed a tool called the Financial Independence Calculator. The Financial Independence Calculator not only acts as a compound interest calculator to show you what your return on investment can be but also incorporates other facets of your financial life, such as your current debt, future equity, and, of course, your future financial goals.
By using the Financial Independence Calculator, you are able to realize a clear and accurate picture of your current financial situation, the financial path you are currently on, and a new path toward optimal wealth and well-being. You control all of the details and inputs and can change them at any time in the experience. The calculator’s sophisticated algorithms will create an optimal path for you to financial independence, while allowing you to achieve your financial goals as quickly and efficiently as possible.
Our financial independence calculator accomplishes this by:
We are incredibly proud of this amazing system. The data and algorithms behind it are incredibly sophisticated. But we feel that people need a clear understanding of where they are and how to get to where they want to go.