One of the first topics covered in almost any personal finance book you read is

the power of compound interest.

Compound Interest 101
You can skip this section if you re already familiar with compound interest and h
ow it works. I m including it for people new to the idea.
Let s say you have access to a savings account that pays 5% interest. You decide t
o put $1,000 and let it sit for future emergencies. For easy math, we ll say it co
mpounds annually (meaning you only figure up the interest on it once a year).
At the end of the first year, that account has $1,050 in it. You have your origi
nal $1,000, plus you have 5% interest on it
$50.
At the end of the second year, the account now has $1,102.50 in it. You have the
$1,050 you had in it after the first year, but this year it earned more interes
t $52.50. Why? The interest earned during the first year is now itself earning i
nterest. You didn t just earn interest on the first $1,000. You also earned it on
the $50 in interest from the first year
an extra $2.50.
At the end of the third year, the account now has $1,157.63 in it. You have the
$1,102.50 from the end of the second year, but this year it earned $55.13 in int
erest.
Now, from the first year to the second year, your interest grew from $50 to $52.
50 an increase of $2.50. From the second year to the third year, your interest a
ctually grew even more
jumping from $52.50 to $55.13 is a $2.63 increase in inte
rest. Not only is the amount of interest growing from year to year, the amount t
hat it grows each year is actually increasing.
At the five year mark, you d have $1,276.28 in the account.
At the ten year mark, you d have $1,628.90 in the account.
At the twenty year mark, you d have $2,653.30 in the account. Your money has more
than doubled without you lifting a finger, and every single year, the money has
grown more than it did the year before.
That s the power of compound interest. It s not impressive at first, but if you stic
k with it, it becomes a locomotive.
Compound Interest Is Great, But There s a Catch
What s the catch? In order to really enjoy the power of compound interest, you ha
ve to let your money sit for a long time.
In the example above, your money has doubled at around the fourteen year mark. S
ure, it s awesome that your money has doubled, but it took fourteen years for it t
o do so. That s a long time. Think about where your life was fourteen years ago.
I was a college sophomore. I was dating the woman I would eventually marry. I ha
d only met one of the large handful of people who would help me build my first c
areer. My life was completely different.
The seeds of a success today were planted in that completely different life.
Compound Opportunity
If you really want your money to have an impact on your life, you shouldn t start
with the investments.
The first thing you should do when you have some money to set aside for the futu

re is to assess your goals. What do you want out of your life? What are your dre
ams? Your hopes for the future?
If things were to fall reasonably well, where would you really like your life to
be next year? In five years? Ten years? Twenty years? When you re 65? Those are t
he questions that should underline how you handle much of your money (outside of
your basic bills).
Sure, we do spend some of our money for today, but spending all of your money fo
r today means that you re ensuring your tomorrow won t be much better than today.
So, how do you most effectively turn that little bit of extra money today into t
he better life that you want tomorrow? There are lots of ways to do that and the
y aren t all found on the pages of a financial magazine.
Do you want a better or at least different
career? The best way to get there is
through education, and the best way to prepare for that is by putting your money
into a 529 college savings plan for yourself for a few years, then making that
leap.
What if you want something that doesn t seem as directly related to finances, such
as better physical fitness? That requires an investment of time and energy, not
so much finances. Those are investments, too.
What if you want freedom from debt so that you don t have the monthly bill stress
and your boss doesn t have as much power over you? That requires an investment, bu
t it s in the form of living lean and making extra debt payments.
In each case, the first little step you make doesn t make a big difference. One da
y of exercise does not change your fitness level. One extra debt payment doesn t r
ock your debt situation. A small amount in a 529 does not alone make for a new c
areer.
Much like with compound interest, it s the continuous steps that begin to build on
themselves. Exercise several times a week and it becomes easier and more reward
ing. Make an extra debt payment every month and the debt begins to melt faster a
nd faster. Regular money in a 529 starts to build on itself, turning a dream of
a new career into reality.
You can build the life you want. You just have to figure out what you want, then
take steps every day to make that life happen, whether it s a money step, an ener
gy step, a time commitment step, or something else. The more steps you take, the
easier they become and the more your efforts begin to reap rewards beyond what
you expected.
Almost every success you have in life is an investment. Almost every success in
life builds on the little steps you ve put into it, growing beyond what you ever e
xpected from them. A dollar in savings every day, a half hour practicing a skill
every day, an energy-burning workout every day.
It all starts with the commitment to take those little steps and see a very smal
l reward from those steps at first. Do it over and over again and those successe
s begin to compound. Stick with it and that investment begins to pay off in ways
that change your life.