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Today Bryce and Alec talk about the 8th wonder of the world – compound interest.
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Alec: [00:00:06] Welcome to bite sized on Get Started Investing feed. In this series, we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the shownotes.
Bryce: [00:00:20] So we're going to call this episode Don't wait to invest, invest and then wait, because that is the power of compounding as Ren just said, if you just let it build and build and build over time, as you'll understand, as we go through a few examples, it becomes incredibly powerful. So Ren Einstein apparently has said that compounding interest is the eighth wonder of the world. He understands earns it and that he doesn't pay it. And so hopefully by the end of this episode you will understand it. We also reached out to some of our community to get their idea on compounding, and one of them has said that compounding to create a passive income is truly powerful and it is something they did not quite realise at the start of their investing journey.
Alec: [00:01:06] Yeah. And so I think the point of this episode is just to really understand what we're talking about when we're talking about compounding and how it can work for you and you know what you need to do. But probably more importantly, what you don't need to do to really enjoy its effects. For some people who, you know, have been investing for a while or been with us on the journey, they're probably sick of us talking about it. But you know what? It's that important. We got to do it again. [00:01:31][25.1]
Bryce: [00:01:32] Yeah, absolutely. So, I mean, Ren you're at school and you're in your maths class and you've.
Alec: [00:01:38] Probably actually dropped maths. Oh, really? And you know what? [00:01:43][4.7]
Bryce: [00:01:44] That is not that is not good anyway. People may have heard simple interest and compound interest. What are we referring to here when we're talking about our compound interest?
Alec: [00:02:01] Well, hold on. Let's take a step back. So interest is the money that you earn on your money in the simplest sense. So you've got a bank account or you put your money in a term deposit or whatever, and the bank pays you some money for putting your money with them. Yeah, that's called interest normally expressed as a percentage. So let's say you put $100 in a savings account and you get 1% interest. The bank's paying you a dollar. Yeah. So that's interesting. There's two types of interest. Simple interest is on that $100. If you're getting 1% every year, you just get 1% of.
Bryce: [00:02:43] So every year, I will just receive $1.
Alec: [00:02:45] $1, yeah.
Bryce: [00:02:46] $1 here. One $1 a year to $1 three, etc..
Alec: [00:02:51] Yeah. Compound interest is where you get interest on the original amount you put in and then all previous interest you've earned.
Bryce: [00:03:01] So I've put in $100 and that's 1%. The next year I will get $1 for that, but then I have a total of $101, and then the next year I will get 1% of $101. And then next year I'll get 10%. That's $101.01.
Alec: [00:03:21] 110 cent one side, whatever. Yeah.
Bryce: [00:03:24] And it continues to build that way.
Alec: [00:03:26] That's it. That's it.
Bryce: [00:03:27] If you enjoyed that bite size, you'll find a link to the full episode in the show notes.
