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Compound Interest

What Tupac says (in his song, Keep Ya Head Up):  
“I’m tryna make a dollar out of 15 cents”


What we can learn from Tupac

Tupac obviously knows that there are ways to make your money grow on its own, without you having to work for it. If you put 15 cents in the right place and let it grow without spending it, eventually, you’ll earn a dollar thanks to the magic of compound interest. (Imagine you put in $1500 instead of 15 cents… then you’d really start believing in magic once you see how much money you earn!)

Compound interest works magic by making money off of your existing money. For example:

Say you invest $1,000 dollars in an account with a 5% interest rate. The first year you’d make $50.00 in interest, the second year you’d make 5% of the $1050.00 so you’d make  $52.50 bringing your total to 1102.00, and the next year you’d make 5% on that amount, and so on and so on year after year.  This is how the rich keep getting richer because they let compound interest work for them.


How you can use Compound interest in your own life to create wealth:

Savings accounts and the stock market are great ways to put the magic of compound interest to work for you and make your paper grow steadily over time, just like Tupac.


The Financial Lessons:

  1. You want to earn interest, not pay it. Compound interest works against you on high interest rate credit cards, leaving you with massive minimum payments on your credit cards each month.
  2. Compound interest only works if you have the patience to invest money (or put it into a savings account) and not touch it for the amount of time necessary to earn interest. Compound interest rewards patience!