The Power of Compounding Interest

By Mike Jacobson

Albert Einstein once said, “Compound interest is the most powerful force in the universe.” Whether or not you agree, it can be thought provoking.

How does compounding interest work? First think of simple interest. If someone borrows $1,000 and pays you 10-percent in one year plus your principal, then in one year you would have $1,100. If instead they borrowed the money for two years at simple interest, they would owe $200 in interest, plus the principal. However, if the interest were compounded annually, then the interest in year two would be based on a principal of $1,100, so the interest in year two would be $110. So each year the interest would be increasing as the principal grows.

A simple tool, the Rule of 72, can be used to determine the future value of an investment. For example: Take $1,000 invested today at 10%. 72 divided by 10 equals 7.2. The investment will double to a value of $2,000 in 7.2 years. The investment doubles again to $4,000 in 14.4 years. It becomes $8,000 in 21.6 years, then $16,000 in 28.8 years.

Suppose, instead of $1,000, you contribute $5,000 to a Roth IRA account. Note that this is less than the maximum contribution, but easy on the math:

1. $5,000 invested today at 10 percent will be worth $10,000 in 7.2 years.
2. $20,000 in 14.4 years
3. $40,000 in 21.6 years.
4. $80,000 in 28.8 years.
5. After 28.8 years the initial $5,000 investment grew by $75,000!
6. Suppose you contributed $5,000 at the beginning of every year, starting with your 24th birthday:
7. Year 1 contribution becomes $95,972 on your 55th birthday, after 31 years.
8. Year 2 contribution becomes $87,247
9. Year 3 ……………………………………. $79,315
10. Year 10 ……………….…………………. $40,701
11. Year 20 ……………………….…………. $15,691
12. Year 31 ……………………………………$ 5,500
13. Total after 31 years would be $1,000,689.

This could provide a tax-free income of $50,000 per year and still grow the principal at 5% a year to protect against inflation. This is considered a conservative withdrawal rate by many financial planners.

It also illustrates a simple way to become a millionaire, provided you have the discipline to start and continue investing and the time to grow your investments. One of the most striking revelations is how much the first contributions grow compared to the contributions made during the “catch up” years. How much does it cost you to delay by one year investing $5,000 in your financial future? Could it be a year of financial freedom?

Please note that it is possible to achieve rates of return significantly higher than 10 percent using leveraged real estate, notes or options. That would enable someone to achieve a desired benchmark or goal sooner. Returns on rental property should also be recalculated each year based on the equity of the property. The examples above use rates of return attainable by reasonable and prudent investors.

How are you harnessing the power of compound interest for your financial freedom?

GaREIA Motivational Minute:

Changing Your View, First Thing Each Day

One of the hardest things for real estate investors to really get a handle on is their daily motivation, and it creates a huge stumbling block for investors who are trying to take their operations to the next level. While it might seem overly simple, the absolute best way to change the way you feel about your real estate investing is to change the way you think about yourself and your day each morning. Changing a simple habit, your first thought of the day or, if you prefer, your first thought of the workday, can revolutionize your productivity in ways you probably have not thought possible. Whether you begin your day in prayer and meditation or with a cup of coffee and the paper, adding a simple, relevant-to-you motivational message to your morning can truly affect your mindset all day.

Here are a few options:

“Starting Stops Most People, But Not Me!”

This mantra has a nice little bit of positive inner dialogue and sets the tone for your day. After telling yourself something like this, it will be a bit harder to get derailed as you encounter challenges throughout your day. And if you’re still investing mainly in off-work hours, then this is more important than ever because it will be tempting to let those hours slide into recreation and relaxation rather than leveraging them toward your future investing success.

“You Can’t Wait for Success to Come to You. Go After It!”

Need a little push forward to “start the race” in the morning? Start by telling yourself that you are a guy or gal who won’t let success outpace them! Setting your mindset on “four-wheel drive” first thing of the day will help you encounter challenges with a positive, productive attitude rather than feeling immediately overwhelmed.

“Failure is an Option, but Giving Up is Not!”

Many investors tell themselves over and over that failure “is not an option.” This leads to an unhealthy attachment to deals that are not actually all that great and can ultimately create discouragement and depression when an investor encounters a stumbling block – and we all encounter them. Remind yourself that failing in one aspect of your investing simply means that you have a learning opportunity, and that the true failure would be giving up. This doesn’t mean that you should be careful and attempt to avoid failure, but you also shouldn’t let it slow you down much when you do.

You may feel like changing just your first daily thought cannot have the power that you’ve probably read time and again that it does. However, consider the possibilities for yourself if this tiny change does have the effects that many positive thinkers claim. You can’t afford not to make this lifestyle change this month!

GaREIA General Meeting Keynote Speaker:

Chris Johnson

Chris Johnson has been a real estate investor for decades and one of the premier experts in grant funding for real estate nearly as long. From funding his own real estate business to expanding options and potential for his students, Chris has been helping other investors land the funding that they need to get started building their portfolios for years now. “Government money has been around for years now,” noted Chris, adding that most people do not even know how much money is available. The results once you know where to look are staggering.

One of Chris’ most recent success stories is a woman who lost her $30,000-a-year job and immediately realized she would have to make some changes if she wanted to stay afloat. Literally 90 days later, she was flipping houses and had even received a small stipend from a federal grant so that she would not have to find a new job while building her real estate business. And if you’re looking for “big names” with whom Chris has worked, he has shared the stage with everyone from Sir Richard Branson to Robert Kiyosaki to Suze Orman, not to mention Al Gore, Rudy Giuliani, and a host of other financial and business experts.

Chris will be speaking at GaREIA’s March 14, 2016 meeting. He will deliver the keynote address and be available after the seminar to meet members and answer questions. GaREIA is thrilled to have this national speaker and legitimate life-changer on the stage this spring, and we hope our members will turn out in force to see him there. If you fail to attend this event, you are literally turning your back on deal funding that you never have to repay and that most investors do not even know exists.

GaREIA meets on the second Monday of each month at the Wyndham Atlanta Galleria, 6345 Powers Ferry Rd, Atlanta 30339. Doors open at 5:30 pm.

GaREIA News Notes: March 2016

** Berkshire Hathaway Stands Strong in the Atlanta Market

Warren Buffet’s real estate company, Berkshire Hathaway, is making moves to dominate the Atlanta market in a big way, partnering with existing metro Atlanta real estate companies in order to get in on the “ground floor” of what most analysts agree is going to be a big year for growth for the city. Atlanta, which is highly affordable, growing, and offers a thriving and diverse jobs market, is poised to appreciate at a much faster rate than the national housing market and attract the somewhat elusive “millennial buyer” in droves. It’s really no surprise that Buffet is moving quickly to expand his presence in the city, working with the top one percent of agents in the U.S. who are also located in the metro area.

** Case-Schiller Predicts 5.5-Percent Appreciation for Atlanta in 2016

Appreciation is nice, but savvy investors know that the best way to be certain they’ll make money on a deal is to factor equity and cash flow into the equation. For homeowners, however, most buyers assume when they buy a home that it will be worth more when they want to sell it in the future. While the housing crash demolished this dream for many homeowners, Atlanta residents are likely to see some pretty serious gains in their equity in 2016 according to the S&P/Case-Schiller U.S. National Home Price Index. In 2015, the city enjoyed nearly 5.7 percent growth in home values, and the Case-Schiller analysts predicted similar numbers for 2016 at the end of February. Another year of 5-percent-plus growth will put Atlanta well ahead of the national numbers and bring many homeowners well into the positive-equity range. Of course, if you haven’t purchased yet, this might be a tough time to buy since the market might begin to level off in the coming years. However, assuming millennials do find Atlanta as attractive as most experts believe they will, we could have several more years of strong growth on the horizon.

** RE/MAX Releases “Top Atlanta Hot Spots” for 2016

So far, the Justice Department, working with the FBI, has charged more than a dozen Georgia investors in this particular case. 12 of the investors have already entered guilty pleas but have not yet been sentenced. Assistant attorney general in the Department of Justice’s antitrust division, Bill Baer, described the alleged actions as “corrupting public foreclosure auctions…to keep for themselves money that rightfully belonged to banks and homeowners.”