My motivation and mission:
Google sheet that contains list of all WCD lessons and links to all content:
Lesson reviewing how to use Google sheet:
I believe becoming wealthy is a pre-requisite to living a meaningful, impactful, and fulfilling life. I will discuss my rational behind this statement in a future lesson, but for Lesson 001 we will be focusing on the two most fundamental and powerful concepts that you need to understand to become wealthy.
Concept #1: Time Value of Money
Concept #2: Compound Interest
Both of these concepts explore the intimate relationship between time and money. You might have heard the saying “time is money”… this might seem superficial at first but the more you explore the concept, the more you will come to understand how powerful and true this statement is.
#1 The Time Value of Money (TVM)
In it’s simplest form, the concept of TVM is that money now is worth more than money in the future ($1,000,000 in the year 2021 is worth a lot more than $1,000,000 in the year 2051).
Why is this true? Why is the present value (PV) of money worth more than the future value (FV) of money?
PV is more valuable than FV because PV can be invested and will grow, over time, to a much larger nominal value than FV. The $1,000,000 in 2021 (if invested at a 10% compound interest rate) would grow to $17,449,402!!!
Another way of framing this statement is that PV is worth 17.45X more than FV (assuming a 10% compound interest rate over 30 years).
#2 Compound Interest
Compound interest was mentioned above, but it is a separate concept from the time value of money (TVM). TVM is the “why” and compound interest in the “how”. Understanding TVM is understanding “why” money now is worth more now than in the future. Compound interest is the mechanism behind TVM; it is “how” money grows in nominal value overtime.
I am assuming you understand the concept of interest, but I’ll make the distinction between simple interest and compound interest. Effectively:
Simple Interest = Interest earned is based only on initial principal
Compound Interest = Interest earned is based on initial principal + the sum of all interest earned
Here is an example to help make the distinction. Let’s assume you deposited $10,000 into a savings account into two different banks that have a 1% interest payment. Bank 1 uses simple interest and bank 2 uses compound interest.
Yearly interest rate of 1% (percent of principal paid as interest payment)
Initial principal of $10,000 (amount you deposited)
You hold your money in the bank for 3 years and then withdraw it
For bank 1, you can see that the interest payment is fixed at $100, but for bank 2, the interest payment is increasing each year from 100 to 101 to 102.01. This is because the compound interest payment is based on the original principal in addition to the interest payments that have been received. (E.G. in year 1, you received an additional $100 into the savings account and this increased the principal from $10,000 to $10,100).
Even though the savings balance increased from $10,000 to $10,100 for bank 1, the principal used in the simple interest payment calculation stays the same at $10,000.
Although in this example, the difference of $3.01 between the two banks seems trivial, compound interest is POWERFUL! The power is due to the exponential nature of compounding. As you can see in the formulas below, time (n) is an exponent. If you have high interest (i) and a longtime horizon (n), the numbers get very large.
Albert Einstein is quoted saying:
“[Compounding] is the most powerful force in the universe.”
“Compound interest is the eighth wonder of the world; he who understands it, earns it. He who doesn’t, pays it.”
Compound Interest Formula
Present Value & Future Value Formulas
Below is my favorite visual that quantifies the power of compound investing and how it impacts the future value of one dollar.
Effectively, if you can invest $1.00 for 30 years, you can turn it into:
$4.32 (invested at 5% compound growth year over year)
$17.45 (invested at 10% compound growth year over year)
$66.21 (invested at 15% compound growth year over year)
$237.38 (invested at 20% compound growth year over year)
Achieving 15% to 20% YOY compound growth for 30 years is an incredibly difficult task, but not impossible. The S&P500 averages about 8-10%. It’s easy to see that even a 1% increase in your YOY growth rate can have a substantial impact to your net worth over time. In future lessons, we will take these concepts and apply them to practical steps that you can take.
Summary
Money grows exponentially. One dollar today is worth many times more than one dollar in the future. If you can save and invest money early in your life, the exponential nature of compounding will grow that present value into a large future value.
Reference Material & Social Media
In Lesson 030 I cover how to navigate and utilize the Google Sheet I have built for all WCD lessons. This Google Sheet contains a worksheet for each WCD lesson. Each sheet has all of the Excel calculations, tables, graphs, and charts that I have posted in the respective WCD lesson. Additionally, the Google Sheet has a master “Index” worksheet that has links to all of the content associated with each lesson.
If you found this post helpful, please like, share, and follow me on my social media channels!