Monthly compound interest

   Monthly compound interest is an extremely powerful way to increase your money in the market.  It is the theory that has produced many million and even billionaires.

    Monthly compound interest is just that.  It means one month your account gains interest.  The next month it gains interest and so on.

    It can really be shown to be quite effective in the long term.  For instance say you figure out how to make 6% off of your money every month.  6% isn’t much.  If you have $10,000 6% of that is $600. 

   That is only $600 in a month.  If you think of it like this you should make $7,200 in a year, because $600 * 12 = $7,200.  But in reality it is much more than that. 

   Let us look at an example, say you make 6% off of $10,000 for the first month.  This is $600.  The next month you make another 6%.  But this time you make it off of $10,600 so you make $636. Every month the amount of money you pull out increases.

   So, if we pulled out 6% a month from $10,000 our investment would be worth $20,121 after 1 year. This is $3,000 more than if we just made $600 a month.   As we go further into the future compound interest grows even faster. 

   After 2 years at 6% interest our account would be worth over $40,000. That is $15,600 more than if we just made $600 a month. This is why Einstein once said, “The most powerful force in the universe is compound interest.”

   Now there is a fault with compound interest.  It is suggested that every month you will make X% on your money.  This is not always the case 1 month you could make 8% another 12% and another -2%. 

   This causes many investors to lose faith in compound interest.  After all if it is not consistent than why rely on it.  That causes many people to aim towards the more consistent annual compound interest.

   The problem with this is that annual returns are not really more consistent.  It is a fact that the SPY goes up an average of 10% a year.  But that is over its lifetime.  Some years it might go up 30% some years it might go down 20%.

   The bottom line is that no matter what you do, you will never get the exact percentage return on your money every month.  You might be able to make 10% off of your money every month for a year or two but sooner or later you will not be able to keep up that exact percentage.  You must rely on your averages.  If you make 8% one month 12% another and -2% another your average return is 6% a month.

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