A $30,000 investment at 5% annual returns grows to $48,008.67 over 10 years. At year 4, when the investor needs $34,000 for a car, withdrawing breaks the compounding. Instead, taking a $34,000 car loan at 7% costs $43,104 total, but the investment keeps growing, netting roughly $12,000 more than withdrawing would.
$30,000
5% per year, compounded annually for 10 years
Year 4
$36,465
$34,000
The interest earned and interest paid, which is the volume of interest that you're going to earn and the volume of interest that you're going to pay, not the rate.
The power of compounding. In this video, we're going to talk to you about the power of compounding. And not in a way that you've heard before, but really the power of true compounding lies in uninterrupted compounding. And today we're going to give you an example of how that will work. Sarblo.
So let's walk everybody through this case study. So there's a person, there's a gentleman. His name is Mr. X. Now, mixture X ran into an opportunity where he could earn 5% on his money for the next 10 years. It's guaranteed he is going to make 5% every year. And in addition to that, that money is also going to compound. So he's going to earn 5% interest in the first year. That interest is going to become part of principal next year, and then the whole money is going to compound every year for next 10 years. He saw that opportunity. He had $30,000 of money saved up. He's like, I am capitalizing on opportunity.
Opportunity comes when you have readily available access to capital. Mr. X had that access to capital. He was able to capitalize on that opportunity. He put in his $30,000. He put his $30,000 into an investment that's going to earn 5% every year for the next 10 years. And he only made one time investment. He's like, this is all the money I have and I'm going to put all my money into this. So this investment is going to compound and grow for the next 10 years. Now.
What you can see is the end of the year money because the investment is compounding. Now, Peter, has life ever happened to you?
I think it happens to everyone.
Absolutely.
To me it has.
No, that's a really good question. The answer is obvious. And so if you're watching this video and if I ask this question to you, has life ever happened to you? I'm guessing the answer is yes. It happens to everybody. And same thing happened with this gentleman. His name is Mr. X. Life happened to him. It happened to him at year four. Now at year four.
His investment value was 36,465 and his car broke down. And that's all the money that he had was 34,465. And he's like, what do I do? I need a car. I need to go from point A to point B. I cannot do without a car. And this is all the money that I have because I put all my money in this investment. What are my options? Well, number one option for him, Peter, is to withdraw the money out of this investment, the $34,000 that he needs to buy the car, and use his own cash to go buy the car. He could have accomplished his objective by withdrawing the money from his investment. Now, Peter, if he would have withdrawn the money from his investment, what would have happened to the future growth of the investment? Would it continue or would it stop?
You're restarting the whole process.
Yeah, the investment will stop growing, but that's always an option. Right now Mr. X said, well, I don't want to interrupt the growth of my money. What I should do is I should actually go out to the marketplace and see if I can get a loan to go buy the car. And he was actually right. He could actually get a loan to buy the car, but the interest that they were charging on the car loan was 7%. He's like, oh my God, what do I even do? Now my investments are earning at 5% and the loan that I'm going to get at 7%. I may lose money here. It actually would be better for me to withdraw my own money to go buy the car. Because if I take this investment, if I take this loan at 7% to go buy the car and my investment is earning 5%, that's a difference of 2%. And I'm going to lose 2% if I take this deal. Well, this is the most obvious thing that will come into our mind's eye because our brain is really focused in terms of rate. Earning at 5%, paying back at 7%. People immediately think that they're going to lose 2%. So if you are like Mr. X and you're thinking in terms of rate, what you may end up doing is you may end up withdrawing the money from the investment to go buy the car because you think you're going to lose 2%. Let's assume that Mr. X actually took some time, he took a step back and he said, you know what? I'm going to do the math before I, I make this decision of withdrawing my money. Now, if I continue earning 10% on my money for the next 10 years.
I would end up making 48,008,67 in my investment.
Now, what would be the interest that I'll have to pay if I'm taking this loan at 7% and the loan is amortized over 7 years?
This way I still have this investment, but I have to pay this loan back. So what would be the difference? Let's see, even if it makes sense. So on the second sheet here, what I'm showing you is let's assume that he never withdrew his money. His money kept growing in his investment at 5%, compounding every year. And he ended up taking a loan at 7% at year four for $34,000 to go buy the car that he wanted.
And the amortization on the loan was seven years. So the total loan repayment to the finance company for the car would have been 43,104 for the next seven years. So from year four.
Till next seven years, he would have continued making the growth in his investment, but he also would have made all that loan repayment back to the car company, car finance company. So the cost of loan would have been 43,104 over the next seven years, but the growth in his investment would have been 48,008,67.
Interest paid on that loan is 9,104. But the interest gain on his investment is almost. What, what's the difference in 48,000 and 36,000, Peter? Roughly, that's about $12,000.
About 12, yeah.
So he would have made 12,000, but it would have cost him 9,000 on that loan. So his net positive gain would have been 57, $5763. So he would have come out ahead financially if he actually takes the loan at 7% and continues to grow his investment at 5%. So if you get into a situation where you have to make these decisions, well, don't make decisions based on rates. Don't think, oh, if I'm earning 5% and I have to pay back a 7%, I'm going to lose money. Do not make those decisions based on rate. Make those decisions based on the interest earned and interest paid, which is the volume of interest that you're going to earn and the volume of interest that you're going to pay, not the rate. Now, what we teach at Ascendant Financial is how, how you can become your own banker. So the example that I showed you, where the power of compounding lies in uninterrupted compounding and never stop compounding money, even you have to borrow money. And if the rate is higher, do your math. What we show folks, we show Canadians coast to coast, individuals, business owners, is how they can achieve the uninterrupted compounding of their money using the process of becoming a banker and finance the things that they need in life. Exactly how we showed you in this example. If you like what you saw in the example, it's even better. By using the process of becoming a banker, make sure that you click the video above. There's a video that's popping up on the video that on this video. There's a link on that video and that video shows you how I purchased my car using the process of becoming a banker. I never interrupted the growth of my money while I used insurance companies money to obtain the objective. Make sure you check out this video and you'll be surprised how I came on ahead financially by doing my transaction using the process of becoming your banker.
