Welcome to the next section investing eye opener. So, previously, I asked you a question. What should you do with the money you save? Would you keep your money in a piggy bank? under your mattress? In a bank?

In the stock market? What would you do? What about investing? Do you already have any particular investments and what have you invested in? Before we go further with investing? I have a question for you.

It's referred to as the magic penny. Let's say you have a choice. two choices. Actually. choice number one is just take $2 million. Imagine right now, you could take $2 million and do with it as you choose.

Or take the magic penny. And this magic Penny does something special. What it does is it doubles its value every day for 30 days. Well, of course there's got to be a catch, right? Why would we call it the magic Penny? Well, if we took that Penny and doubled it every day for 30 days, the value would come out to be over $10.7 million, definitely better than $2 million.

Right. This example is an illustration of something called compound interest. Wikipedia defines compound interest as the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. Which means if you invest money into something, you expect a rate of return, let's say 5%. As time goes by, and you make interest on your investment, you also start to make interest on that interest and it just gets bigger and bigger as time goes by. Well, Warren Buffett with an estimated net worth of over $76 billion, someone who is unquestionably one of the most successful investors in history, said that his wealth comes from a country combination of three things, living in America, some lucky jeans and compound interest.

Sure, America is great because it's considered the land of opportunity. And yet DNA has something to say his personality is very investment driven. But number three, what I want you to focus on his compound interest, its compound interest that made his money, make money. And Albert Einstein had something to say about compound interest, too. He said, it's the eighth wonder of the world. And more specifically, and take note, quote, he who understands it earns it.

He who doesn't pays it, if you don't take advantage of investment opportunities, you may end up paying interest instead of earning it. Let's go through one more scenario and I really quite like this one. Let's suppose that there are two friends who just graduated high school and have entered a university. We'll call them Jake and Katie about 19 years years old each. Although friends, they decided to take two different paths. Regarding finance.

Katie decides she'll get a part time job and invest about $2,000 every year from the age of 19 to 26, earning a compound interest rate of about 12%. Once she's 26, she stops completely enter investment continues to make money continues to make interest and compound. On the other hand, we have Jake, Jake decides not to invest anything at all. Instead, he wants to enjoy his time in university. After he graduates he gets a job. Then he decides to start investing at the age of 27.

He does the same thing as Katie did. He invest $2,000 a year and continues to do that for another 39 years. Once Jake and Katie Are retirement age around 66. They reap the rewards of their investment. At this point, Jake has invested a total of $78,000 over a 39 year period. And Katie, on the other hand, invested a total of $16,000 over an eight year period, although she did start seven years earlier, once they're 66 years old.

What do you think the difference is between the gains they've made through these investments? Katie has made a whopping $2.28 million dollars at this point. How about Jake? Only 1.5 million. That's a stark contrast. And that's the power of compound interest.

And in order to understand a little bit more about compound interest, you want to understand the two types of interest. There's simple and compound and both are available in investments. simple interest is a fixed straight. Let's say you have $100 and 8% interest, no matter what, over time, you're going to make $8 on that investment every year. However, with compound interest, you'll make $8 the first year, and then you'll make another 8%. On the $108, you had the second year, and it continues to grow.

So that's a no brainer, right? You want to go with compound interest. To make it a little clear. Let's look at a few examples between simple interest and compound interest. And here we're going to invest $10,000 in simple interest and $10,000 in compound interest, both of these at the same rate of 8%. Here in year one, from $10,000, we get $800 return With $10,800 at the end of year one, we have the same thing over here in the first year with compound interest.

But beginning in year two things start to change. The difference is although in simple interest, we still get the same rate of return 800 800 800 every year. What changes is we're making interest on our interest with compound interest. Notice the first year's return is $800, the second 864, the 933 and 1008. And it just continues. Imagine doing that over 20 or 30 years imagine continually reinvesting money.

So where should you invest the bank, the stock market? Well, the two most common places to put your money that have compound interest are banks and the stock market. Which one do you think is considered the best option In the bank, you have other options such as checking account savings account, money market account and certificates of deposit, respectively. Usually a checking account will be 0.05% as well a savings account. money market is twice that at 1%. And a certificate of deposit is a full 1%.

Not bad, right? Well, let's look at the stock market. On average, in America, at least, the stock market returns eight to 10% per year. However, banks do guarantee these interest rates so if you really want to play it safe, put your money in the bank. However, the stock market may have an average eight to 10% per year return. But it's not guaranteed.

It really depends on the economy and how things are going. However, over the long term, the chances are you'll get that eight to 10% return. So bank or stock market. Well I'll tell you why. The rich don't keep their money in the bank. There's a calculation or let's say there's a financial trick called the rule of 72.

And this helps you understand the difference between 3% 4% 5% return, because there's just sort of numbers, right? Well, the rule helps you understand how long it's going to take for your money to double with compound interest. And it's a simple equation, simply divide 72 by the interest rate. For example, if the interest rate is eight, it's 72 divided by eight. So where to invest banker stock market? Well, let's take another look at the checking savings, money market and certificates of deposit.

How long will it take for you to double your money checking and savings account? 1440 years that's kind of a long time. Take care of yourself money market account 720 years still huge amount of time certificate of deposit 70 Two years, you might make it long enough to see your money double. But what about the stock market? Let's take the 8%. Divide 72 by eight and how many years?

Will it take? only nine years to double your money? Again, what would you choose? So I have the same question for you as earlier. When should you start investing? Yes, you guessed it right now, take your money, put it into something that you trust that you've done your homework, and that earns compound interest.

Now, I'm not here to give you advice on exactly where to put your money. So I suggest do a little research, you can find indexes, mutual funds. Other investments that earn compound interest in are considered relatively safe. So the next time you have some free time, Google investments that earn compound interest and go from there. So to recap this lesson, investing it opener we took a look at should you save or invest? invest is probably the wisest choice.

We explained the difference between compound interest and simple interest. Of course, compound is the way to go. We looked at the differences of compound interest in banks and the stock market, we took a look at the rule of 72. This simple trick, this simple equation will help you understand how long it should take for you to double your money. And we answered the question, when should you start investing now? Great.

That's it for this lesson. Let's get ready for the final section of this core lesson mystery question answer