Ever wondered why some people seem to effortlessly amass wealth while others live paycheck to paycheck? It may well boil down to understanding and mastering one simple concept: compound interest. As your enthusiastic hosts, Oscar and Zeke, we'll unpack this complex financial tool in a way that's engaging and straightforward. We explore the dual nature of compound interest and why it's critical to use it to your benefit rather than let it become a burden.
In this spirited chat, we go beyond the numbers and discuss the larger implications of financial literacy in our society. We question the glaring gap in our education system when it comes to practical financial knowledge. We wonder why crucial concepts like compound interest, so pivotal in everyday financial decisions, are often overlooked in schools. From a nostalgic trip back to our school days to a lively discourse on the power of compound interest in investing and credit card debts, this episode offers you the keys to navigating the tricky world of finance. Whether you're a seasoned investor or just embarking on your financial journey, we guarantee you'll find value in our candid conversation.
For any enquiries or to connect with Oscar, Zeke, or their company, Asset Road, listeners can visit the following links:
The advice shared on The Finance Bible is general in nature and does not consider your individual circumstances. The Finance Bible exists purely for educational / entertainment purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs
Ever wondered why some people seem to effortlessly amass wealth while others live paycheck to paycheck? It may well boil down to understanding and mastering one simple concept: compound interest. As your enthusiastic hosts, Oscar and Zeke, we'll unpack this complex financial tool in a way that's engaging and straightforward. We explore the dual nature of compound interest and why it's critical to use it to your benefit rather than let it become a burden.
In this spirited chat, we go beyond the numbers and discuss the larger implications of financial literacy in our society. We question the glaring gap in our education system when it comes to practical financial knowledge. We wonder why crucial concepts like compound interest, so pivotal in everyday financial decisions, are often overlooked in schools. From a nostalgic trip back to our school days to a lively discourse on the power of compound interest in investing and credit card debts, this episode offers you the keys to navigating the tricky world of finance. Whether you're a seasoned investor or just embarking on your financial journey, we guarantee you'll find value in our candid conversation.
For any enquiries or to connect with Oscar, Zeke, or their company, Asset Road, listeners can visit the following links:
The advice shared on The Finance Bible is general in nature and does not consider your individual circumstances. The Finance Bible exists purely for educational / entertainment purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs
Zeke Guenthroth:
Hey guys, welcome back to another episode of the Finance Bible podcast.
Oscar Don:
We are your hosts, as always, oscar and Zeke, and please note that nothing in this podcast should ever be considered as personal financial advice.
Zeke Guenthroth:
And if personal financial advice is what you are after, then please get in touch so that we can connect you with the correct professionals to make sure that the job is done correctly.
Oscar Don:
Enjoy the show Today, Zeke, we are talking about compound interest, what it is, what to avoid, what to look for and basically to navigate through it. We spoke about this probably 12 to 18 months ago on. I think it was our second ever podcast episode. Correct me if I'm wrong, but we just thought we'd refresh it and talk about the new insights. But before we do that, Zeke, Movenber is still underway. How is the Mo looking?
Zeke Guenthroth:
The Mo is looking. It's looking, yeah, nice and dirty. I've got a few compliments. I've got a few, not compliments, not compliments, you mean it's not. Yeah, not compliments Like that is a dirty, dirty mustache, but not in a good way, and I'll be like, oh okay, A dirty Mo is definitely a compliment, but when they throw not in a good way on the end of it it's not a compliment.
Oscar Don:
Well, the good news is you have the month of November to kind of get away with it. As soon as December hits, you've got to kind of get rid of it. But I'm picking up from the airport next Tuesday and, believe it, I believe you still are planning to have that Mo on you, even though it's December.
Zeke Guenthroth:
I will still be rocking the Mo for that initial interaction, just so that you're going to be funny going through the airport with it like it's a dirty Mo. It's not pretty, but I love it. It's my favorite time of the year. You can get behind men's mental health and rock a good Mo while you do it, so why would you not?
Oscar Don:
Yeah, love it, love it, All right. So, moving on from the Mo mentioned compound interest. What is I'll do my definition in a moment? What is your definition?
Zeke Guenthroth:
I think compound interest is. I mean in simple terms, first of all, interest on interest. That is what compound interest is. Right, you've got interest and there's more interest accumulating on that interest. Breaking it down a bit further, you have a principal amount, there's interest on that amount, and then, as the years go by well, the months go by, depending what it is it builds up and builds up and compounds. It can be your best friend, it can be your worst enemy. I love it. What about you?
Oscar Don:
You do love it. Yeah, so exactly right. In simple terms, it is interest on interest. It's basically when interest on the sum of money continues to add to that amount. So, for example, if you are investing in shares, over time it's gonna continue adding continually on the original amount that you've invested, which is a good outcome. But the other side of that equation let's just use credit cards, for example If you continue to make the minimum repayment each month, you know the sum of interest will continue to add up over time, which is a negative way. So you're spending more money, you own more money, which can really push you down the cliff mentally, financially. And yeah, you've really gotta make sure that compound interest is working for you and you're not the one getting basically ripped up because of the credit card situation.
Zeke Guenthroth:
Getting ripped up. I like it.
Oscar Don:
Getting ripped up, like the credit cards should be as well, if not used appropriately.
Zeke Guenthroth:
Something that really triggers me into it is in school, right. What did you learn about compound interest and how to use it and that kind of thing?
Oscar Don:
Well, thinking back, I don't think we really did speak about mainly. We spoke about, like trigonometry and algebra and all that, but in terms of compound interest you might have had a couple lessons, but nothing really in depth of like everyday life for it. Did you guys, because obviously we went to different schools? Did you learn anything about it, or was it basically the exact same thing?
Zeke Guenthroth:
We had a very minor topic on it, like not in depth, I think it was in relation to compound interest on a credit card, or it might have been a car loan, one of the two, but it was kind of what we were doing depreciation on cars at the same time. I think you're 11 or you're 12.
Zeke Guenthroth:
Yeah true, not much on it and definitely not in a positive light of how to use it for you. Here I am sitting here a couple of days ago, I'm rocking a gorgeous master, as you can imagine. I'm relaxing, and my little sister comes into my room. She goes I've got this assignment and I go. Okay, she goes. You can probably help me with it. She sits it down now. Precursor yourself, myself anyone over the age of probably 20, I don't know when it changed, but I assume over the age of 20. We all used to do the old fashioned exam, a test. Right, you go into mathematics, they have an exam on the table. You do it. You've got to remember the formulas, you've got to do everything yourself right, correct.
Zeke Guenthroth:
So the shock on my face and the disappointment she comes into my room and she goes my assignment is and hands it to me. It's on compound interest in credit cards and stuff. They don't do tests in math anymore.
Oscar Don:
What, so they take it home to do it.
Zeke Guenthroth:
They take it home. She's got one and a half weeks to do a test I would have done in 35 minutes in class, knowing the formulas in my head. In fact, I can probably do that without a calculator sitting there looking at it in five minutes today. I'm enraged.
Oscar Don:
Well, and the problem is as well, especially with chat, gpt and just online resources a lot of kids, if they take home tests I would probably say 90% of them would just Google it or ask family friends or pop it through the AI and answer it for them. So technically they're not really learning anything, so that is the only thing I know.
Zeke Guenthroth:
If they don't have to sorry, if they don't have to recall it and they can sit there and do it, open book and Google it and cheat, then they're not learning anything, whereas we had to sit there and actually do it on the spot with our mental recall capacity and, yeah, we learn.
Oscar Don:
Well, that is a bit concerning now, let's say for the future generations there, but I think it's. If that is the case, I do think it's more important than to learn on platforms like the finance Bob podcast or other podcasts or platforms out there about these things, because Obviously, no one's learning now if that's getting the test taken home. So that's a man. I'm actually quite shocked.
Zeke Guenthroth:
Yeah, I'm quite disappointed. I think they need to get me in charge of the education of the whole of Australia. Moving on, a Couple of examples of compound interest in action. Right, don? You actually mentioned the two examples I want to talk about more in depth, which is credit card and shares. As well as shares you can talk about, like interest in bank accounts or whatever they will work exactly the same credit cards. Breaking it down really simple for you guys you first of all have your initial balance right, so you've made a purchase. Let's say it was. You know you buy a, okay, it's other. It could be tickets to tea swizz, it could be a red dress you'd address up in on an. That is a throwback to all of our og fans.
Zeke Guenthroth:
Yes you then have that principal amount. I would call it 500 bucks. The interest rate on that might be 19% on a credit card or 21% in today's environment. You get charged that interest, you make the minimum repayment. The minimum repayment doesn't pay back the interest you charged, and Then the next month that comes along, the interest is charged again and again, and again, and again and again. That's basically how it works on a credit card. Unless you're paying higher amounts than the minimum repayment, you're going to lose a lot of money long term. Anything to add to that, mr Don?
Oscar Don:
Um, now, that is that spot on. I just think for anyone who is wanting to obtain a credit card, by all means Do it if you feel like you want one or need it, but just remember to when I use mine, my mindset is I just use it instead of my debit card. So, whatever, whatever amounts on my debit card, I literally use my credit card for points, to get up those quantists points, which is always good, but then pay it back straight away to avoid this interest, because it does add up quickly and, as you would know, zeke, probably a few years ago when we were living together, my credit card I would have had a bad credit card bill and that just kept adding and adding and it was. It was tough to get down, but Once, once you get it down, you are, you really did it, make sure you don't go back there. So I have lived this firsthand of the interest rate Compounding in a bad way, and I can confirm.
Oscar Don:
And confirm, and it is. It is not good. You lose sleep overnight, you're thinking ways how you can pay this down and it's just always in your head. So make sure you can only spend what you can afford. But if you have the choice between a credit card and a debit card, choose a debit card.
Zeke Guenthroth:
Moving on to the second example, which is shares or interest in a bank account. So which shares? That works basically. You know your own shares in the company, you've got a stake in it. You get paid dividends. The dividends are reinvest compounds.
Zeke Guenthroth:
Using a simple Calculation, an actual, real-life one, here I'm just going to say it is in an interest account. Okay, this interest account we're gonna say it pays 8% just for a bit of fun and You've invested 1k. Today you invest $50 a week moving forward for the next 30 years. By the end of that 30 years you have $333,000 give or take and the interest on that is 254 grand, whereas your deposits are only about 79 grand. So the interest accumulates massively over that long duration of time. And that's when compound interest is best, because it compounds and builds and builds and grows over a long amount of time. If you change that strategy a little bit you do the exact same thing, but only for 15 years Then your interest doesn't half. You'd think our 15 years, 30 years, it's half. The interest might be half. No, it goes down from 254 grand to 38,000 dollars. So a huge difference of over, yeah any sign, simple example.
Oscar Don:
Those are very simple example and it shows that time is on your favor.
Oscar Don:
So, even if you're a let's say 15 or 16 and you don't have much money, even if you pop in, let's say, 20 bucks a week, just starting Younger and having an extra five, ten, fifteen years of when you're wanting to retire is a big Different, as you just mentioned there, with the numbers to show the overall amount, and there's heaps of different platforms online you can actually play around with this money smart Compound interest calculators a good one ideas in the past so you can pop in what you're happy to Contribute on a regular basis, how often it is your initial deposit and how many years you want to do this for, and that will show you the exact number compound of the interest rate you give it, of when you hit, let's say, 60 years old, what the total amount will be and that total amount that you would have obtained through the investments as well.
Oscar Don:
So there are a lot of good tools out there. If you're trying to figure out I want this amount of retirement through shares, what do I need to put in per week? So it's probably good idea to start thinking about it, as opposed to getting to 55 or even 50 and not starting yet, because time Is always on your side in investing like this.
Zeke Guenthroth:
Yeah, compound interest. Summing it up, it can be really really bad in terms of the bad examples, like a credit card, a car loan, a mortgage, stuff like that. In terms of investing, it can be really, really positive and you can manipulate that and use it to your advantage and Really just get good growth with that. It's how I leveraged into my first investment property. It's how a lot of our clients are actively Going ahead and building up the savings to then invest or buy their first home and that kind of thing. It's only a small commitment every week, consistently for a long amount of time and it pays off. Aside from that, have a lovely day. Catch you next time.