Money Rehab with Nicole Lapin - The Power of Compound Interest

Episode Date: March 1, 2022

Compound interest is what people are talking about when they tell you to “make your money work for you.” Focusing more on making money than coupon clipping is important, but making that money make you even more money is what separates the rich from the super rich. It’s truly the secret to growing wealth overtime by doing pretty much nothing. Today, Nicole puts that secret out in the open. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. You guys, my latest book, Miss Independent, hit the Wall Street Journal's bestseller list at number two.

And normally, Mama only likes number one, but I am so honored to be on this podium. And I will happily take the silver to Mr. James Clear and his stellar book, Atomic Habits. But I wanted to celebrate with you guys by sharing another excerpt from the book. Compound interest is what people are talking about when they tell you to make your money work for you and also what they warn about in the case of ginormous mortgage payments or snowballing credit card debt. Focusing on making more money than coupon clipping is important, but making that money make you even more money is what separates the rich from the super rich.

It's truly the secret to growing wealth over time by doing pretty much nothing. I'm sure some of you already know the difference between compound interest and simple interest, but I'm going to give you a quickie refresher. And if you know me, you know that I try really, really hard with those sports analogies, but I don't always nail them, especially those involving golf. As you might recall from a confession in Rich Bitch, I indeed bought soccer cleats for my very first golf lesson, thinking that those were the little spiky shoes appropriate for the golf course. That is not a joke. My athletic skill matches that of my sports analogies, so a really good

bet against me would be $1 per hole. There are 18 that I know of. It's almost guaranteed that I wouldn't make the shot, much less know which of the clubs to pick up. Now, a shark might say to me, let's make it interesting. Let's double that dollar every hole. Well, it's only a buck. What's the worst thing that could happen? Let's see. A buck doubled would be two bucks for hole two. Then two bucks doubled would be four bucks for hole three and eight bucks for hole four. This seems still doable, but wait. Let's see how much I'd be in the hole, har har, see how much I'd be in the hole, har har, if I actually took this bet. By hole 18, I would owe $131,072. Guess you could say that situation escalated pretty quickly. I'm thankful that I do get how compound interest works, so I wouldn't fall for that shit. But it would be a pretty sweet deal for the shark.

So let's be the shark and move the course to Wall Street. Now, this exact doubling bet isn't one you're going to find in any particular stock or investment, but the concept is the basis of virtually every one you'll make. So it's important to make sure you really have it down. Compound interest is where your money grows on itself exponentially, making interest on interest, thereby working for you. Simple interest, on the other hand, is where your money grows at a fixed rate without taking the growth it caused into consideration. So the interest is based only on the initial principal investment. Compound interest can be calculated at different intervals, from daily to annually. Some banks promise instant interest reports, but don't be fooled. That's basically the same as daily.

In the example that I just told you about, it is calculated annually. But the frequency matters a lot. The basic rule is that more cycles of compounding, the more compound interest you make. So 10% interest once a year is less than 5% interest paid every six months, which is actually 10.25% a year. When it works in your favor, you want as frequent as possible. And when it works against you, like with a mortgage or credit card payment, you want the fewest possible cycles. Here's the typical frequency of compound interest in your favor. Savings, daily. Certificates of deposit or CDs, daily, monthly, or semi-annually. Money market accounts daily. Here's the typical

frequency of compound interest that works against you. Credit cards monthly, mortgages monthly, personal business loans monthly. When compound interest works in your favor, it can truly be magical. It's an awesome hedge against factors like lifestyle creep that can cut into your wealth. But it can also be magical when it works against you because if you know the mechanics behind why it didn't work, you can then get it to work for you in your favor. For example, if you make your mortgage payment twice a month instead of once a month, you can save substantial interest in the long run. For today's tip, you can take straight to the bank. I'm sure you've heard other money experts out there spew this financial wisdom. If you want to save more money, sweat the small stuff or don't

buy the latte. While I understand the intention behind this financial advice, I call BS. In many areas of life, the little things matter. In relationships, in science, in cooking. But when it comes to growing your wealth, the big things matter more. Think of it this way. What's going to matter more to your bottom line in the long run? The $3.50 you saved on that latte? Or the $3,500 you saved in interest by focusing on getting your

credit score up and your interest rates down. That's why I've long said, buy the damn latte, get your ass caffeinated, and then get after major ways to save and even better, major ways to earn. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine law for her production and writing magic and Brandon Dicker for his editing engineering and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.