Make a Million Dollars 15-Years Faster

How interest rate differences make a huge impact on your wealth

It’s a pity that many people do not start to really understand how investment returns will impact their lifestyle until later in life—and all too many never at all. You are reading this, so kudos that you recognize the importance of understanding this.

As Ted Parker laid out in “In a World of Low and Negative Interest Rates, What Is an Investor to Do?”, low and negative interest rates have become our permanent environment. But, how exactly does that affect you? Turns out that the interest rate on your savings or investment is even more important when compounding is taken into consideration.

Simple versus Compound Interest

Just in case you were out sick that day in math class when the teacher covered the power of compounding interest, here is a quick rundown. If you weren’t sick, feel free to skip to the next section.

Interest is paid either on a simple or compound basis. Simple interest: you deposit $100,000 in an account that’s paying 5% interest. You will collect 5% of your deposit in interest each year. After one year you’ll have $105,000 — your original balance of $100,000 plus 5%, or $5,000. After two years, another $5,000 is added, for a total of $110,000. After 10 years, if the interest rate has been a steady 5%, you’ll have your original $100,000 plus another $50,000. At a simple interest rate of 5%, you will have doubled your money in 20 years.

Now if you start with $100,000 and earn 5% compounded interest each year, let’s see how that goes. After the first year, you’ll have $105,000, because 5% of $100,000 is $5,000. However, you leave that $5,000 in the account and after the second year you’ll receive 5% of the $105,000, or $5,250, bringing your new balance to $110,250. At a yearly compounded interest rate of 5%, you will have doubled your money in 14.4 years, versus 20 with simple interest. See the Rule of 72 for quickly calculating doubling time.

How to Collect Your Million Faster

Starting with $100,000, and adding $20,000 per year, at a 9% compounding interest rate, you would have over a million dollars in 15 years.

Starting with $100,000, and adding $20,000 per year, at a 2% compounding interest rate, you would have over a million dollars in 30 years, double the time required.

You might be thinking, this is all great in theory, but where can one find a potential 9% return?

Alternatives

With the example above, a bank CD is not going to work. Currently, finding a CD paying even 2.0% would be a miracle. But hey, it’s safe, right?

An alternative could be bonds or other similar fixed-income investments. However, while the interest rate is certainly better than a CD or money market, fixed-income returns are anything but fixed. They swing wildly with how the wider market and economy is doing. Not the safer harbor you likely wanted.

There is another alternative, a private debt fund.

There is another alternative, a private debt fund. A private debt fund has steady returns and is relatively insulated from public stock market swings. One low-risk example is private debt funds issuing commercial real estate bridge loans.

Investors in a commercial real estate debt fund earn an interest rate much higher than the market, in the range of 8% to 9% or more. To keep risk low, investors can choose a fund that lends on income producing commercial real estate, especially multifamily apartments.

Now, you have the tools to get your million dollars faster!

Learn more about passive investing in Commercial Real Estate Debt at Kirkland Capital Group