Let us die wealthy

It all comes down to interest rates. As an investor, all you’re doing is putting up a lump-sump payment for a future cash flow. – Ray Dalio

“Interest” is interesting, understanding this in personal finance or investment term will make you wealthy or poverty-sicken. Sadly most people only focus on borrowing on lower interest rate but never pay attention to how they can grow money and build wealth.
Interest is calculated based on interest rate

What is Interest Rate?

Interest rate is ‘returns you earn on your investment‘ or ‘the cost of borrowing on your debt‘ For the savers and investors it is the money in amount earned on investment or savings (principle amount) and for borrowers it’s the money on principle amount (fee or rent) you pay to the lender on the debt.

Calculating Interest

Interest can be calculated in two ways: simple interest or compound interest.

Simple interest

Simple interest is the interest calculated on the principle money lend or borrowed. The Formula to calculate is Principal x Interest Rate Per Year x Term (years).

Usually simple interest are used for calculating interest amount for short term debt or savings like certain types of bonds, certificates of deposit (CDs), savings accounts, treasury bills, personal loans, student loans, and auto loans, payday loans, car title loans and more.

For Example. if you borrow or lend 1000 dollars to or from bank or with a interest rate of 10% and agreed to pay off in 3 years You will earn or pay $1000 x (10/100) x 3. = $90 interest amount. So at the end of the 3 years you will earn or payed $1090. i.e. Principle + interest amount = $1000 + $90 = $1090.

Compound interest (interest on interest)

Compound interest (interest on interest) is the interest calculated on the initial principle amount that is lent or borrowed. The beauty of compound interest is that income or debt is calculated from accumulated interest earned or owed from previous periods Formula to calculate compound interest is = Principal x [(1 + Annual Interest Rate/100)^(Number of Compounding Periods) – 1] ^ = power of. Formula seems to be complicated. US investor.gov site has as calculator which is very easy to use.

Usually compound interest are used for calculating interest amount for long term debt or savings like certain types of bonds, certificates of deposit (CDs), savings accounts, treasury bills, mortgage.

For example: if you borrow or lend 1000 dollars to or from bank or with a interest rate of 10% and agreed to pay off in 3 years You will earn or pay $1000 x [(1 + (10/100)) ^ (36 ,months)] = $331.18 interest amount. So at the end of the 3 years you will earn or payed $1090. i.e. Principle + interest amount = $1000 + $331.18 = $1331.18.

If you are a saver or lender compound interest will make your money grow at an accelerating rate over time, sadly if you are a borrower your debt will grow in accelerating rate over time.
Below are the 3 key factor you should keep in mind when you lend or borrow money.

Interest Rate: The higher the interest rate, faster you income or debt will grow.
Compounding Frequency: The smaller the compounding frequency, your will money or debt will grow exponentially. for example every day, month or year.
Time or Duration: The longer the better as interest on interest will grow your income or debt faster.
NOTE: The beauty of compounding is you accelerate wealth exponentially. You build wealth by combining the 3 key factor to your advantage. For borrower you path to poverty will be accelerate exponentially.

Compound Vs. Simple Interest

Comparing our example between Simple Interest $90 and Compound Interest $348.18 compound interest gets us 2.86 time more interest money to be earned or owed.

Compound Interest will accelerate the building of wealth for lenders and savers on flip side it also accelerate borrowers to poverty if they don’t have ability to pay their debt

Disclaimer –
“Believe nothing, no matter where you read it, no matter if I have said it, unless it agrees with your own reason and common sense.” – Buddha

Inflation is a form of tax, a tax that we all collectively must pay. – Henry Hazliz

Inflation is devaluation of fiat currencies against the current reserve currency of the world dollar. Personally I will compare devaluation of fiat currency value to the real money gold. After “second world war” gold became the reserve currency as many times before in history.Iin 1971 dollar replaced gold as the reserve currency. for more information read “Nixon shock“. Image below the article title gives you an idea of the devaluation (declining purchasing power) of dollar over the years. if you are not in USA you can check the online the decline of your country against dollar and gold to get an idea.

Inflation will reduce your purchasing power of day to day items basically you are become poorer and poorer.

Honestly to be wealthy we need to beat and over perform inflation or at least break even. There are many ways to beat inflation below are some ways to achieve it.

Live miser and without debt. once you have excess fiat currency lend or invest in metals and asserts.
Borrow money only for productivity like education, shelter, start a business and pay them as soon ask you can. if you borrow money to spend you will be pushed to poverty.
Pay your credit card debt every month without fail. In USA we can set auto payment every month from your bank account. explore what is available in your country.
Improve your skills by learning.. write articles, books, make content and post in social media and make extra income
Buy metals like physical gold and silver Less returns during peaceful times but in time of war, pandemic like COVID it will perform well. Metals are generally good for store of wealth or value. Ask or read online about stories of refugees who fled war, natural disaster zones how metal help them to safely migrate and start a new life in foreign country. After dollar gold is the second reserved currency at this point of time.
Lend money to banks buy opening savings account, fixed deposit account, compound interest savings account (CD’s in USA)
Buy government bonds, corporate bonds for an exchange of interest
Invest in mutual funds, stock, exchange traded funds (ETF)
Start a business.

What creates inflation?

Inflation is caused by the lax monetary policy of a governments.. i.e. too much money printed by government and circulated than the size of the countries economy. for more information read about quantity theory of money.

Example: During COVID pandemic countries around the world needed money without being productive so they printed money and the inflation went high. Basically too much money available in the hands of citizens to buy products and services but manufacturing or import came to a standstill so less product and services available. This supply and demand caused price to rise. Basically for the same value of product or service you pay more money.