Understanding Compound Interest for Personal Trainers and Coaches
Compound Interest. Two simple words but many people still don’t understand what it is or how does it work. But is it really important? How does compound interest give advantage to us financially, anyway?
Before we get into that, it’s necessary to know the basics of compound interest.
What is Compound Interest?
By definition, compound interest is the interest calculated on the total sum of an original principal and accrued interest. To simplify it, compound interest is the “interest on interest”. That means you earn interest on the total money you invested plus its previous interest.
It is one of the most important fundamental concepts when it comes to personal finance and investments. Studying compound interest can be your first step if you want to manage and grow your wealth. It works like magic in your investments, as you don’t have to exert effort just to increase your invested money.
Notes to remember:
Original principal is the initial amount of money you put into your account.
Accrued interest is the interest you earned on your principal, but not yet withdrawn or taken.
Growing Compound Interest Over Time
It is difficult to grasp the meaning of compound interest if only through words, so let’s apply it in an example. But before that, you have to understand first what simple interest is.
Simple interest is an easy method of computing earned interest. It is multiplying the interest rate to a certain amount. It goes like this:
Assume you have a $300 money invested in your account, with an interest rate of 5%. Then $300 multiply by 5% is $15. The $15 is your interest earned. The method used is simple interest. When it comes to this method, generally, the amount of interest is just the same regardless of the period.
Now, let’s move on to the compound interest. Compound interest is like the simple interest method, but in its calculation, it considers the period – or the time. From the previous example, let’s put it this way:
Assume you have a $300 principal amount with an interest rate of 5% annually, invested for 10 years.
For the first year, your interest earned will be $15 ($300 x 5%). But when the second year comes, your interest earned will become $15.75. So, how does it happen?
In the first year, you have a $300 initial amount in your principal. If you will add this to your interest earned of $15 for the first period, your investment’s future value will then become $315. This value will carry forward to the second year of your investment.
The $315 will then multiply to the interest rate of 5%, thus earning interest for the second year of $15.75. For the second period, your investment’s future value will be $330.75, i.e. $315 plus $15.75.
This process will continue until the due of your investment period – 10 years. See below computation for your better understanding:
From your $300 that you invested in the first year, it will grow up to $488.67 after 10 years. The difference between them is the total interest earned in 10 years which is $188.67. That is 63% of $300, meaning your money will grow that much after ten years period.
But if we will compare this to the simple interest, you will have a total interest earned to only $150. This is because the simple interest method will not consider the accrued interest that you earned from previous years. Thus, the future value of $300 after 10 years under simple interest method is only $450. It is just a 50% increase, compared to the 63% that compound interest can give.
The Importance of Time
Now that you have a better understanding of compound interest, let’s talk about the importance of time in this method. As you have seen from the example above, the longer the years are, the higher returns you can get. That means if you started investing earlier and the investment periods are longer, you’ll earn a greater amount of money. And this is how compound interest works with time. You can earn so much more without even doing anything.
Many people are taking advantage of this method, and they often use it for their retirement savings. Since the money you invested grows exponentially and not linear, you can take a lot of time to earn more. Time is the wealth driver of investment when it comes to compound interest. Generally, it focuses on your long-term financial strategy.
However, not all people acknowledge and appreciate this concept because it works only for long-term investments. Some are looking only for sources of income that they can easily get within a short time. For them, compound interest is not the ideal strategy to accumulate wealth because they get impatient of waiting.
Do Trainers and Coaches Need Compound Interest?
Many trainers and coaches are busy taking care of their own business and managing their business’ operations occupies most of their time. However, having one source of income is not enough nowadays. It is always important to have a back-up plan, especially when unexpected circumstances occur – like a pandemic.
One job or business cannot always guarantee better retirement savings. When you earn enough today, set aside your savings right away and invest them in your account. When you start to invest and use the compound interest, you are opening a tremendous opportunity in your wealth creation.
Compound interest is a powerful tool that can surely lead your money to exponential growth. If you take advantage of its ability, you will certainly enjoy the financial benefits it provides. You can save a lot of money for your retirement, or even retire earlier without worrying about your finances.
Getting Started
For trainers and coaches, the earlier you begin, the better. Invest while you can and while you earn. You can’t always have the assurance that money will keep on coming in the business. It is never too late. And if you start today, it will make a huge difference in your future and your financial goals.
Check out this list of fitness careers that let you follow your dreams which includes what it takes to start a career in personal fitness training. This is your most affordable and fastest way to become a highly qualified personal trainer.
Is your re-certification coming up? Learn more about earning your CEU credits. You can find the full list of CEU courses here.
If you are ready to start your online personal training or coaching business, don’t forget to learn more about our online coaching course.
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Remember, NESTA and Spencer Institute coaching programs are open to anyone with a desire to learn and help others. There are no prerequisites!
That’s it for now. Take action!
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NOTE: When you take your fitness business home, you can also work with clients outdoors as you operate your business from your kitchen table and even coach clients online from home.
