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Question: Hey Rick, Why is compound interest so important, could you explain?

Answer: What a great question. I will give you my answer shortly, but let me first answer this in the words of Benjamin Franklin back in 1748. He was a big proponent of compound interest. He described it as follows: "Money is of a prolific, generating nature. Money can beget money, and it's offspring can beget more."

I am not sure that I can say it any better than that. Your money may grow faster if you let it compound and don't subject it to reduction in the form of taxes each and every year. You can accomplish this with only a couple of investment vehicles.

An example of how you DON'T take full advantage of this is as follows: Please note that this is for illustrative purposes only and is not indicative of any particular investment.  Your results may vary.

You have a $50,000 CD and earn 3% this year. You are in a 30% tax bracket and the interest is reportable on your taxes. You report $1,500 of interest and pay 30% of that or $450 in taxes.

Your net return is just about 2%, not 3%. You didn't use the money and you probably just rolled it into another CD the next year. But you still had to pay the taxes and reduce your net rate and the amount to compound the next year. Why do that when you don't have to?

J. Paul Ghetti, who was a Billionaire enteprenuer was asked what his secret of wealth accumulation was. He said: "Don't pay taxes on your interest if you don't have to". He understood the power of tax-deferral and compound interest.

People are living longer and are going to need their investments for a longer period of time during retirement. If you don't want to outlive your money, you have to take advantage of compound interest and tax-deferred investing or you may be in for a surprise down the road.

Thanks for asking. Rick.

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