Ditch All those Get-Rich-Quick Passive Income Strategies: Use this Proven & Reliable Way Instead.
Explore the true path to passive income and leverage the Power of Compounding
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Passive income refers to the money earned with minimal ongoing effort, which is achieved by investing upfront and then enjoy a consistent stream of revenue over time. Simply put, passive income allows you “making money while you sleep”.
Who doesn’t want passive income? I’m sure you have seen tons of articles and videos promising passive income strategies, but the reality is that most of those strategies don’t work. Or if they worked, everyone would be rich!
In this article, I will show you the true path to passive income: The Power of Compounding!
Did you know that 99% of Warren Buffett’s net worth was earned after 50 years old?
Oh, you don’t want to wait until you are 50? Don’t worry. I have good news for you! But you need to know that you need to start planting those money trees NOW! Let’s explore more together.
💡 The Power of Compounding Effect
Would you choose $1 million in cash or a penny that doubles every day for a month?
Which would you choose?
Let me help you answer this question and show you the power of compounding.
If you have 1 cent and double it 10 times, it will be worth $10.24
If you have 1 cent and double it 20 times, it will be worth $ 5,242.00
If you have 1 cent and double it 30 times, it will be worth $ $ 5,368,709.12 😲
Is this even possible? Sure it is!
This requires, of course, patience, consistency, and a long-term investing perspective, but it is indeed possible.
The stock market returns, on average, 10%/year (at least the S&P500). If you invest in it and get the average returns, you will DOUBLE your money every 7 years.
So, if you save $5,000 now, it can easily and passively be worth $10,000 in 7 years from now.
That’s why whenever I’m about to spend money, I think to myself:
Is it really worth spending $100 on these new headphones or keeping the money and having $200 7 years from now?
As you can see in the previous table, you can basically double your money every 7 years just with average stock market returns, which can be done by investing in an index fund. You don’t even need to be an investment genius!
Compounding works like magic for investing, and it applies not only to the stock market but also to crypto (where you can have compounding on steroids) and every other aspect of life!
If you want to learn more crypto investment techniques, check out my Crypto Investing Expert Masterclass.
📌 Here’s another example of the power of compounding
According to a legend, a king became so passionate about chess that he wanted to reward the person who invented it. The king presented the chess inventor with an opportunity to choose his desired reward, to which the intelligent inventor responded:
Your Majesty, may I request a favor? Please place one grain of wheat on the first square of your chessboard, and then double the amount of wheat each day until all squares are covered. This will be a great reward for me. Thank you.
And the King replied:
Noted, I’ll make sure your request is granted.
The king ends up having to pay 1.4 trillion metric tons of wheat, which is over 2,000 times the annual world production of wheat!
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💡 Compounding Explained
Compound interest is truly a remarkable phenomenon. It has the power to make your money grow exponentially, and it’s the only true passive income strategy that works even while you sleep.
Compounding works like a snowball. It starts slow, but the bigger it is, the bigger it gets!
📌 Let’s say you start by investing the $5,000 you have in savings, and you can get a 10% return:
At the end of year 1, you will make $500 ($5,000 * 10%), and now your portfolio is $5,500.
In the 2nd year, you will make even more. Why? Because you will make money on the $500 that you have earned before. You will then make $550 ($5,500 * 10%).
On your 7th year, you will make $1000 in profit and have already doubled your money. Pure passive income!
📌 Here’s what happens when you have yearly compound rates for different assets: stocks (S&P500), bonds, and crypto (with respective average returns):
Compounding is pretty impressive and powerful. These returns might not be guaranteed, and markets do have volatility, but this is to show what long-term investing and compound interest can do for your investments.
If you keep investing and getting the same returns, after 20 years, you will have:
— $40,312 in stocks; or
— $14,589 in bonds; or
— $454 million in crypto (which is less likely because crypto will not consistently grow 150%/year for the next 20 years)
💡 Calculate Your Compound Effect
📌 The formula to calculate compound interest is very simple:
Final amount = initial investment * (1 + yearly return)^number of periods
So if you invest $10,000 and get 25% per year, after 5 years, you’d have:
Final amount = $10,000*(1,25)^5
Final amount = $30,517
📌 You can also use online calculators like this one to calculate compound interest:
📌 Another simple way to check the compound effect is by looking at the table below. The table shows how many times your wealth will compound at different combinations of rates and years:
As you can see here, there’s a good reason why Warren Buffett is one of the richest people in the world. Throughout his career, the average return on his investments is 22%. Compounding that, it’s a huge snowball!
💡 There is no time like the present to take action towards your goals
Start now! A Chinese proverb says: “The best time to plant a tree was 20 years ago. The second best time is today.”
📌 Let me give you an example of what this means. We have 2 people investing. They both generate 11% a year (which is not hard!):
👧🏻 Alice:
- Starts investing at age 20
- Monthly investment: $600
- At age 40, she has $524,743 (of which $380,143 was earned passively)
- She can retire in Thailand with this money 🍹
👦🏻 Bob:
- Starts investing at age 30
- Monthly investment: $600
- At age 40, he has $131,992 (of which $59,392 was earned passively)
- He cannot retire in Thailand yet and has to work a few more years
The good news for Bob is that he has more savings than 90% of the people, and if he has a frugal life to increase his savings rate, he can also retire earlier!
Guess which chart is for Alice and which is for Bob?
Alice is on the left, of course! You can see the accrued interest in orange and her savings in blue, which, as you can see, is growing really fast and outpaces her savings.
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💡 Conclusion
As Einstein said, compound interest is the eighth wonder of the world.
The good news is that you don’t need to be Einstein to achieve this. The strategy is to consistently invest (for example, DCA — Dollar Cost Averaging and portfolio rebalancing), be a long-term investor, and be consistent.
Starting investing early is also going to give you a good head start, but it’s never too late to start.
Are you ready to leverage the power of compounding effect to true passive income? ✨
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