Our Penny Vs. Million Dollars Activity has to do with compound growth and is a great way to get anyone to understand the power of money invested over time.
Albert Einstein is often quoted as saying that “compound interest is the most powerful force in the Universe” and adults who don’t understand investing often say that compound interest is the most important thing for kids to learn.
We disagree…but only slightly.
It’s actually ‘compound GROWTH’ that is the powerful force, not just interest, and here’s why.
When people invest wisely with the goal of creating financial freedom for themselves, they put money into assets/investments that sooner or later (hopefully sooner) produce a regular stream of cash flow, or passive income, for them to live on. This way they eventually get to work because they WANT to and not because they HAVE to.
Many of the returns on these types of assets/investments aren’t based on interest at all.
Consider buying stock in a company.
You do it for a couple of reasons. First, with a ‘hope’ that the value appreciates (goes up) so you can eventually sell it for more than you paid for it…BUT this doesn’t produce cash flow for you to live on.
The real reason you should be investing in stocks is so that stock pays you a regular dividend, you CAN live on that. But remember, not all stocks pay dividends so do your homework when investing in the stock market for cash flow.
Consider buying a piece of rental property.
If you rent it out for more than your monthly mortgage payment, you CAN live on the excess. You can’t live on the appreciation, however, unless you eventually sell it and put the money you made on that appreciation into some type of other asset/investment that does provides you a regular stream of cash flow.
The only way that return is interesIf, however, you lend money on a first or second mortgage and that person is paying you interest, money that is compound interest based if you are the lender, i.e., you are playing the bank by lending someone money who will then pay you back what he borrowed, plus interest.
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