Every plan to build starts with a solid foundation. Building a house, a life of faith, and even a financial plan. Previously, Start with Why? and Assessing Vitals launched you into this endeavor by probing your beliefs around money and getting a pulse on your finacial health. To continue this introduction of foundations, let’s explore the power of compounding interest.
Simply stated, compounding interest is added payment that gets multiplied on top of another payment. The question you should ask though is “Am I making that payment?” or “Is that payment being made to me?” As you will see, compounding interest can be like rocks that burden you or rockets that propel you toward your financial goals.
Rocks That Burden You
Debt/loan payments are, unfortunately, the form of compounding interest that many are most familiar with. Think credit cards, student loans, auto or house payments. This is the extra payment one must make for the cost to borrow money. Looking at the illustration below, imagine you bought an airplane ticket to your home country for $1,000. You used your credit card with an interest rate of 15%. If you only paid the minimum of $25/month, it would take you over 4.5 years to pay off the debt. Also, your trip home would end up costing you, not $1,000, but $1,400 due to the power of compounding debt interest! But you only budgeted $1,000 for flights for furlough. As the interest compounds, your financial plan becomes handcuffed and burden by the increased cost.
What’s the solution? Plan ahead. Try and pay cash for these types of purchases or at least have a game plan to get your debt paid off fast. Also, you may try consolidating your debt to get a lower interest rate. (You can see this in action on the interactive graphic below. Move your cursor across the screen. Here’s the source.)
Rockets That Propel You
Now before writing off compounding interest as evil, let’s look at what happens when its effect is harnessed for your benefit. Time is the most impactful variable in compounding interest. The more time that payments have to multiply on top of one another means the more time, in this case, your money has to grow in value. Check out the example below. Investor 1’s contributions of $50,000 turn into $787,000 of savings all because she started earlier. Investor 2’s contributions of $150,000, 3x that of Investor 1, only reach $612,000 of savings. This is all because his investment had 10 years less to compound compared to that of Investor 1. Can you see the power of compounding interest? A rocketship indeed!
What’s your action step? Start saving NOW. As you can see from this illustration, don’t get caught up on how much you can save. In reality, time is your most valuable resource.
Everyone who has left houses or brothers or sisters or father or mother or wife or children or lands, for My name’s sake, shall receive a hundredfold, and inherit eternal life.Matthew 19:29
You, cross-cultural worker, are making an investment. And while Jesus was likely speaking symbolically, it is worth noting his reference of compounding. This wasn’t the only time either, recall the Parable of the Talents. Whether in time, talents, or treasures, we have an opportunity to steward our resources well and see the remarkable impact of compounding interest on the Kingdom of God. In his book, The Eternity Portfolio, Illuminated, financial advisor and investor Alan Gotthardt draws out a really thought-provoking illustration. He notes, “If we are laying up treasure in heaven, our investments will compound over eternity…Wow! What does ‘a hundredfold’ look like? Setting aside annual compounding, what if we just received rewards equal to one hundred times what we invested…That’s 10,000% in investment returns!” Now, that’s the rocketship I want to be on!
What are some of the situations you are facing with the power of compounding interest, either as rocks or rockets? Do you still have debt weighing you down after many years on the field? Do you feel like you’ve missed an opportunity in retirement or education savings? Share with us in the comments below so that we can continue to know how to serve you in your life overseas! We’d love to take some of these comments and build future articles and resources on them.
The thoughts and opinions shared in this article are for general information and thought provocation only, and do not take into consideration your personal financial circumstances. I am not a registered financial, investment or tax professional, but someone who wishes to share what I’ve learned through managing finances as a cross-cultural worker. For professional financial advice, please consult a licensed professional.