Welcome to this post on why we need to expand our ideas of essential skills for millennials and gen Z!
I’m currently a senior in high school. Last year in my English class, my teacher made a comment that resonated positively with my peers. He noted that wealthy people are financially successful because they use their money to make more money. But, it was the way it was said that stayed with me. There was hostility in his voice and my peers seemed to agree with this contempt. I thought deeply about this experience and found it frustrating. That frustration hasn’t gone away.
While I’m young, and some may say inexperienced, last year I earned a 20 percent return with my investment portfolio. My frustration in the story above is rooted in the fact that school never taught me anything to help me produce this return on my money. Rather than being cynical and distrusting of finance, I have taken time outside of school to learn about it. While I am still developing an understanding of money, it’s clear to me that a lot of people are not equipped with financial literacy skills. In my case, school didn’t teach me this, life did.
When I was ten years old, my parents split up. It was the biggest lesson in money management I could receive. I realized that money is very important and could affect my life for better or for worse. This experience made me want to escape the negative hold that poor financial management habits create. With this as the backdrop, a conversation with a friend changed my life. My friend mentioned day trading to me and I found it incredibly interesting.
Naturally, I thought it was an easy way to make money. I started off trading a live account with $1000 and a strategy that I didn’t fully test, but I made 10 percent and I believe the only reason I didn’t blow my account was because of my strict risk management. My second attempt at trading was preceded by proper studying, planning, and testing of my own strategy. I was much more prepared this time and made 20 percent in the second quarter of 2021. The return is not the most important part of this story, rather, it’s these results are repeatable. This is one of the biggest lessons I have learned in my young life.
The above realization made me examine ways to grow my money. Without question, the most powerful tool I discovered was compound interest. It is our greatest resource to growing and staying wealthy. And this is the message that I want to share with other young people because I know that many are not hearing about this important concept elsewhere. I am writing this message because I want to help young people reach their financial goals faster and live an easier life. My overall message is this: young people crave freedom and I think it is possible to create if for yourself. You don’t need to use get-rich-quick schemes. There is a time-tested way to be financially independent and compound interest is it. Simply put, it can help you escape many of the negative holds that money has on your life.
Let’s examine why compound interest is such a powerful tool.
Time is an asset when it comes to compound interest
A large component of growing your money is time. When it comes to compound interest, the more time your money is invested, the greater your profit could potentially be. In investing a decent amount consistently from a young age, you could end up with a greater return than someone who starts investing at an older age. You’ll likely earn more by investing less because time does the work of earning for you. An example of this can be seen in these tables.
This table indicates what would happen if you were to invest $3600 each year at an 8% return from age 25 – 35
| start principal | start balance | interest | end balance | end principal | |
| 1 | $3,600.00 | $3,600.00 | $288.00 | $7,488.00 | $7,200.00 |
| 2 | $7,200.00 | $7,488.00 | $599.04 | $11,687.04 | $10,800.00 |
| 3 | $10,800.00 | $11,687.04 | $934.97 | $16,222.00 | $14,400.00 |
| 4 | $14,400.00 | $16,222.00 | $1,297.76 | $21,119.76 | $18,000.00 |
| 5 | $18,000.00 | $21,119.76 | $1,689.59 | $26,409.34 | $21,600.00 |
| 6 | $21,600.00 | $26,409.34 | $2,112.73 | $32,122.09 | $25,200.00 |
| 7 | $25,200.00 | $32,122.09 | $2,569.75 | $38,291.86 | $28,800.00 |
| 8 | $28,800.00 | $38,291.86 | $3,063.35 | $44,955.21 | $32,400.00 |
| 9 | $32,400.00 | $44,955.21 | $3,596.41 | $52,151.62 | $36,000.00 |
| 10 | $36,000.00 | $52,151.62 | $4,172.12 | $59,923.75 | $39,600.00 |
| 11 | $39,600.00 | $59,923.75 | $4,793.90 | $68,317.66 | $43,200.00 |
| 12 | $43,200.00 | $68,317.66 | $5,465.42 | $77,383.07 | $46,800.00 |
| 13 | $46,800.00 | $77,383.07 | $6,190.65 | $87,173.71 | $50,400.00 |
| 14 | $50,400.00 | $87,173.71 | $6,973.91 | $97,747.61 | $54,000.00 |
| 15 | $54,000.00 | $97,747.61 | $7,819.81 | $109,167.42 | $57,600.00 |
The example shows what amount of money you would earn if you started investing 3600 a year at 8% interest/gain on your money each year from age 25-35.
You would invest a total of $54,000 and end up with $109,167.42 at the end of the fifteen-year period. This means that you doubled your money in 15 years.
Why did I choose $3600 to be invested each year? Well, this represents 10% of the average North American’s yearly salary, which is an amount that the average person should invest if they see value in this equation.
The second table below displays what would happen if you kept those 109,167.42 dollars in your account and just let it sit, compounding at an 8% rate for 25 years until the age of 60.
| start principal | start balance | interest | end balance | end principal | |
| 1 | $109,167.42 | $109,167.42 | $8,733.39 | $117,900.81 | $109,167.42 |
| 2 | $109,167.42 | $117,900.81 | $9,432.07 | $127,332.88 | $109,167.42 |
| 3 | $109,167.42 | $127,332.88 | $10,186.61 | $137,519.51 | $109,167.42 |
| 4 | $109,167.42 | $137,519.51 | $11,001.57 | $148,521.07 | $109,167.42 |
| 5 | $109,167.42 | $148,521.07 | $11,881.70 | $160,402.76 | $109,167.42 |
| 6 | $109,167.42 | $160,402.76 | $12,832.22 | $173,234.98 | $109,167.42 |
| 7 | $109,167.42 | $173,234.98 | $13,858.81 | $187,093.77 | $109,167.42 |
| 8 | $109,167.42 | $187,093.77 | $14,967.50 | $202,061.28 | $109,167.42 |
| 9 | $109,167.42 | $202,061.28 | $16,164.89 | $218,226.18 | $109,167.42 |
| 10 | $109,167.42 | $218,226.18 | $17,458.09 | $235,684.27 | $109,167.42 |
| 11 | $109,167.42 | $235,684.27 | $18,854.74 | $254,539.01 | $109,167.42 |
| 12 | $109,167.42 | $254,539.01 | $20,363.12 | $274,902.13 | $109,167.42 |
| 13 | $109,167.42 | $274,902.13 | $21,992.18 | $296,894.31 | $109,167.42 |
| 14 | $109,167.42 | $296,894.31 | $23,751.57 | $320,645.85 | $109,167.42 |
| 15 | $109,167.42 | $320,645.85 | $25,651.66 | $346,297.52 | $109,167.42 |
| 16 | $109,167.42 | $346,297.52 | $27,703.80 | $374,001.32 | $109,167.42 |
| 17 | $109,167.42 | $374,001.32 | $29,920.12 | $403,921.42 | $109,167.42 |
| 18 | $109,167.42 | $403,921.42 | $32,313.71 | $436,235.14 | $109,167.42 |
| 19 | $109,167.42 | $436,235.14 | $34,898.82 | $471,133.95 | $109,167.42 |
| 20 | $109,167.42 | $471,133.95 | $37,690.72 | $508,824.67 | $109,167.42 |
| 21 | $109,167.42 | $508,824.67 | $40,705.98 | $549,530.64 | $109,167.42 |
| 22 | $109,167.42 | $549,530.64 | $43,962.44 | $593,493.09 | $109,167.42 |
| 23 | $109,167.42 | $593,493.09 | $47,479.46 | $640,972.54 | $109,167.42 |
| 24 | $109,167.42 | $640,972.54 | $51,277.80 | $692,250.34 | $109,167.42 |
| 25 | $109,167.42 | $692,250.34 | $55,380.02 | $747,630.37 | $109,167.42 |
In this table, we can see that your end balance is $747,630.37 dollars, which results in a 685% increase from your $109,167.42 compounded from your $54,00 investment.
Now, here’s the major point. Let’s examine your results if you invested $3,600 a year from age 35-60 (25 years)
| start principal | start balance | interest | end balance | end principal | |
| 1 | $3,600.00 | $3,600.00 | $288.00 | $7,488.00 | $7,200.00 |
| 2 | $7,200.00 | $7,488.00 | $599.04 | $11,687.04 | $10,800.00 |
| 3 | $10,800.00 | $11,687.04 | $934.97 | $16,222.00 | $14,400.00 |
| 4 | $14,400.00 | $16,222.00 | $1,297.76 | $21,119.76 | $18,000.00 |
| 5 | $18,000.00 | $21,119.76 | $1,689.59 | $26,409.34 | $21,600.00 |
| 6 | $21,600.00 | $26,409.34 | $2,112.73 | $32,122.09 | $25,200.00 |
| 7 | $25,200.00 | $32,122.09 | $2,569.75 | $38,291.86 | $28,800.00 |
| 8 | $28,800.00 | $38,291.86 | $3,063.35 | $44,955.21 | $32,400.00 |
| 9 | $32,400.00 | $44,955.21 | $3,596.41 | $52,151.62 | $36,000.00 |
| 10 | $36,000.00 | $52,151.62 | $4,172.12 | $59,923.75 | $39,600.00 |
| 11 | $39,600.00 | $59,923.75 | $4,793.90 | $68,317.66 | $43,200.00 |
| 12 | $43,200.00 | $68,317.66 | $5,465.42 | $77,383.07 | $46,800.00 |
| 13 | $46,800.00 | $77,383.07 | $6,190.65 | $87,173.71 | $50,400.00 |
| 14 | $50,400.00 | $87,173.71 | $6,973.91 | $97,747.61 | $54,000.00 |
| 15 | $54,000.00 | $97,747.61 | $7,819.81 | $109,167.42 | $57,600.00 |
| 16 | $57,600.00 | $109,167.42 | $8,733.39 | $121,500.81 | $61,200.00 |
| 17 | $61,200.00 | $121,500.81 | $9,720.06 | $134,820.88 | $64,800.00 |
| 18 | $64,800.00 | $134,820.88 | $10,785.66 | $149,206.55 | $68,400.00 |
| 19 | $68,400.00 | $149,206.55 | $11,936.53 | $164,743.07 | $72,000.00 |
| 20 | $72,000.00 | $164,743.07 | $13,179.44 | $181,522.52 | $75,600.00 |
| 21 | $75,600.00 | $181,522.52 | $14,521.81 | $199,644.32 | $79,200.00 |
| 22 | $79,200.00 | $199,644.32 | $15,971.55 | $219,215.86 | $82,800.00 |
| 23 | $82,800.00 | $219,215.86 | $17,537.26 | $240,353.13 | $86,400.00 |
| 24 | $86,400.00 | $240,353.13 | $19,228.25 | $263,181.38 | $90,000.00 |
| 25 | $90,000.00 | $263,181.38 | $21,054.51 | $287,835.89 | $93,600.00 |
From this table, we can see that the person who started investing from age 35 invested more money than the one at age 25, but still ended up with less money because the 25-year-olds money had 15 years more than the 35-year-olds to compound. The difference in wealth creation is outstanding!
Your money diminishes in value each year
We rarely speak about this, but every year your money losses approximately 2% of its value. This year it has been much more and it looks like this trend isn’t stopping. This means that if you save your money, you lose your money because you’ll have less purchasing power every year. The basic high yield savings account can barely keep up with inflation each year, so while school teaches you to save, there are many wise people out there who are letting their money work for them and compound over time. Instead of losing value in money, they are growing their wealth and making it easier to gain freedom, help family, and maybe even quit that job they hate.
Consider this example. In 1980 a movie ticket cost on average $2.89, but by 2019, the average price of a movie ticket rose to $9.16. This is a 316.96% increase in price while the value of your money stayed the same if it wasn’t put to work in an investment
You can have more freedom and retire early
One of the many things young people crave is freedom, Freedom from their job, freedom to eat wherever they want, freedom to travel wherever they want, and freedom to do whatever they want. When you are not dependent on a paycheck, you have more options and more time for the things you love. This freedom can be achieved by investing and letting your investment compound over time to an amount that is suitable for you.
Compound interest can become its own income source
Compound interest has the power to form an additional income source. To get to this level you would first have to find an asset class to grow your money and let your gains compound over time, while also reinvesting your gains. There are many different asset classes: equities, stocks, bonds, real estate, infrastructure, private equity, hedge funds, art, collectibles, and insurance. An asset is something that appreciates in value. The best assets are those that appreciate at a rate that beats inflation over a period of time. Each of these asset classes is very different and I urge you to do your own research before investing in any of these. They all require different amounts of capital, effort, and risk tolerance and there are many different strategies for investing in them.
What can an additional income source do for you? Firstly, the obvious thing is that it can allow you to quit your job if you have compounded enough for you to live off of. Secondly, it can help you live more comfortably, have more money to enjoy life, and experience what the world has to offer. It can also get you closer to your financial goals and you could even use it to invest more. Let’s be honest. Who wouldn’t want extra money? Money can make life easier and much more enjoyable, especially if you choose an asset class that allows you to just sit back and watch your money grow.
Last words
Ultimately, I think there’s a problem that doesn’t really need to exist. As I see it, school’s main focus is to get you educated to get a job. Why do you want a job? To get money! In other words, money is essential to our lives and our well-being, yet, there is so little time spent on teaching important financial concepts in school. I see small positive changes happening in this regard, but ultimately, it’s each individual’s responsibility to take the time to learn the rules of money. Concepts such as compound interest, investing and risk management are major things that can be key to your financial freedom, and not knowing this dramatically increases the likelihood of financial hardship.
The signs and the implications of poor financial literacy are growing more apparent. The gap between the rich and the poor is growing and it is happening faster than ever. Consumer credit card debt is at all-time highs. However, those with assets are richer than ever. Again, it doesn’t have to be this way.
It’s never too late, but it’s also never too early, to start using compound interest to your advantage. I believe you should start as soon as possible. Don’t delay! We can all enjoy the wonderful things compound interest has to offer.
