In 1916 a character in an advertisement in a California newspaper called “compound interest” the “greatest invention the world has ever produced”. But it is not particularly easy for one to climb up out of the working class—especially if he is handicapped by the possession of ideals and illusions. I lived on a ranch in California, and I was hard put to find the ladder whereby to climb. I am good at financial planning and keep track of the latest developments in financial products and services. Financial planning is a life-long project; the earlier you start financial planning, the sooner you can enjoy the benefits and achieve your financial goals. Back to Albert Einstein
With such potential for astronomical growth, it’s no wonder Albert Einstein called the power of compound interest the most powerful force in the universe.
Social security is squarely based on what has been called the eighth wonder of the world—compound interest. A growing nation is the greatest Ponzi game ever contrived. The Eighth Wonder of the World—eighth in point of time, but first in point of significance was today dedicated to the use of the People. Amid the booming of cannon, the shrill whistling of a thousand steamers and the plaudits of great masses of citizens the Brooklyn Bridge .
You’ll end up putting in $60,000 in that case, but you’ll only end up with $87,000. That’s a $27,000 gain — not a negligible sum, but not nearly as impressive as a gain of $155,000. We have a 2-year-old and another baby on the way, and we love Greatest Gift’s discover section. I look forward to learning about the right financial tools to help build their future and set them up for success financially. So, with a 10% interest rate, your money would double in about 7 years.
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If we use compound interest for good, we can harness its incredible power to help propel us forward. Einstein didn’t just say that it was pretty cool or good in some way; he said it was the most powerful force. Now, just for fun, imagine in the above example that each period represented a year instead of a day. And those 30 years were your working years when you had the choice of putting something aside for retirement. Investor 1 was able to start early, and that allowed the POWER OF COMPOUNDING to do its magic.
- There is, however, a limitation on how long individuals can compound their wealth tax-free.
- Einstein was a remarkable physicist and mathematician.
- As you test this equation you will see that even on day 20 your penny is only worth about $5000.
- The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker.
- And the longer you give yourself to benefit from it, the wealthier you stand to become.
Old Grandpa Rockerfeller the multi-millionaire who preached thrift said something I never forgot. He said, “The 8th wonder of the world is compound interest.” Unfortunately very few people understand the magic of compound interest. QI hypothesizes that the statement was crafted by an unknown advertising copy writer.
Strategies for teaching financial literacy.The power of compound interest, and the power of saving early. Strategies for teaching financial literacy. If you want to see the math in a spreadsheet, you can view it here.
Compound interest may not be Einstein’s eighth wonder, but it is a powerful tool for investors
Also, a quotation from a famous person is often considered more interesting and entertaining. Inaccurate attributions are readily propagated. We created his gifting page with Greatest Gift and shared it on the birthday evite. We received 12 gifts that will be going to his college fund and savings.Love this platform.
It should, because exponential growth (also known as compound growth) is difficult for the human mind to grasp. Perhaps it prevents you from signing up for a high interest credit card. Imagine that instead of $100, you saved $10,000 and earned 10% for 30 years.
I know it’s a total mind blow but here is the take away:
But if you break out your calculator and double one penny for 30 days you will be amazed that on day 30 your penny would be worth over $5,000,000. And this is where Albert Einstein comes into play. According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” At first this quote might seem like a bit of an exaggeration but the math behind it shows that it is not.
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Rather, you’re getting the option to take advantage of compounded returns, since stocks don’t pay interest like bonds and savings accounts do. But all told, compounding could really work to your benefit, especially if you give yourself a long investment window. Most people would go for the $10 million option as it is hard to imagine that $1 doubling 30 times will become $1.07 billion! This is the power of compound interest – your principal would accumulate with interest earned during the investment period, yielding more returns.
There is a really cool tool here at Monevator, which allows you to see the effects. An initial deposit of £5,000, with £2,000 added every year and a 7% rate of return becomes half a million in forty federal and state tax years and a million in 50. This table shows the effects of compounding at different rates of return, but it assumes you don’t add to the initial pot. If you do that, the effects are more dramatic.
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$10,000 for 30 years at 10% per years turns into $174,494.02. The table below, courtesy of Visual Capitalist, demonstrates the maths. All you need is time – lots of it – and some discipline. Before we get started today, if you haven’t already seen it, check out my interview with Alex Langer of Sierra Madre. There could be quite an opportunity setting up with this silver mining company. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The longer the investment period, the more you will benefit from compound interest. Let’s use the same payment scheme as our mortgage example. Let’s even use the same interest rate for growth. If you were to make payments of $1,073.64 per month for 30 years into some interest bearing account, earning a mere 5%, do you have any idea what that account would be worth? (Neither did I, but I have a HP12C Financial Calculator from 1989.) Those payments would have grown to $902,066. With compound interest working against you, those payments would retire a debt of $200,000.