And the longer you give yourself to benefit from it, the wealthier you stand to become. 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. The problem though, is that there is substantial doubt he actually said that.
Let’s say you put $100 into a savings account and that balance grows to $105 by virtue of earning interest. From there, you’ll be able to accrue interest on not just your initial $100, but rather, on $105. But if you’d rather grow your money into a larger sum over time, then investing it is your best bet. And the sooner you start investing, the more wealth you stand to accumulate. Compound interest has been called the eighth wonder of the world. It magically turns a little bit of money, invested wisely, into a whole lot of cash.
- Compounding rewards consistency and time, not the amount.
- Before an avalanche can smash trees and break legs, it needed to become a snowball first, and a piece of snow before that.
- Quote investigator also found some earlier quotes claiming that compound interest is the “greatest invention”, but none of them involve Einstein in any way until well after his death.
- June Greg’s father deposited $6.11 into her account 98 years ago, when she was only two years old.
- As your savings grow, you earn interest on a bigger and bigger pool of money.
You’d have 16 times your money in less than 30 years. Having compounding interest on your side is something to be grateful for. Starting now is still going to give you more substantial returns than doing nothing.
I know it’s a total mind blow but here is the take away:
His work on the theory of relativity revolutionized our understanding of time, space, and gravity. And yet, it’s a fundamental life skill with big impacts on one’s future. The impact of compounding on fees should also be considered as this can significantly erode the value of your portfolio.
All because you were able to make the “sacrifice” of packing your lunch. I mean, I literally will eat a salad with a half pound of chicken on it, cucumbers and hummus, and an apple and I am spending about $3 total on that meal. It’s a complete steal when you think about the amount of food, the quality of that food, and the price that I am paying. That first year you did make $500, or 10% on your $5K investment.
Nowadays it’s somewhat hard to go out to eat for under $10, and then you can tack on a 20% tip and end up at $12 pretty quickly. Historically, the S&P 500 has returned about 10% on average, but just to be a little bit conservative, let’s go ahead and use an 8% return because I’d rather underpromise and over perform. The earning aspect is very, very similar to the example that I just gave you above. That example might seem outlandish but it’s really not.
And if I can be quite frank, it’s why broke people are broke and rich people are rich. Why is compounding interest a greater teacher of patience? Well, for one, you don’t see results overnight.
- This allows them to invest smarter and take advantage of those compounding returns.
- This interest earned on interest results in the maximisation of returns over time.
- Compounding interest is easily illustrated by the Rule of 72.
- It’s a complete steal when you think about the amount of food, the quality of that food, and the price that I am paying.
- But, in Year 2, you’re going to make 10% on your $5,500 invested rather than just the $5K that you initially put in.
If you use the power of compound interest you will grow your wealth. Many people will go out and max out that $12K limit that I mentioned and simply just make minimum payments on that card which are typically 3% or so. So let’s pretend that’s exactly what I did rather than correcting my actions. The possibility of this is all due to compounding interest. By investing in companies that are growing, an initial investment could multiply many times. Einstein suggests that compound interest can work for you or against you.
Even Albert Einstein — a bit of a smarty pants — is said to have called it one of the greatest mathematical concepts of our time. With so much strife and hardship in the world, it’s more important than ever to practice gratitude for the things that are positive in your life. When it comes to personal finances, the items discussed above are things of which investors can be thankful. Let’s say you have $100,000 and are earning 10%. Under the rule of 72, you would have about $200,000 in 7.2 years, $400,000 in 14.4 years, $800,000 in 21.6 years, and $1,600,000 in 28.8 years.
Like the slow tortoise, conservative investments beat out high flying “trendy” stocks. And this is where Albert Einstein comes into play. According to Einstein, “Compound interest is the eighth wonder of the world.
What did Einstein say about compound interest? (
Compound interest is a fairly simple concept that has a huge impact on your investments. The basic rules of success for an investor are a function of your net investment return over time and the length of time you remain invested. Compound interest requires that you lock in your money for a longer period to get the most significant benefits. If you have a loan, compound interest can have a potentially negative effect. Because loans, especially credit cards and mortgages, use the compound interest method and you end up paying a lot more in interest than if you had a simple interest-rate loan.
Published Nov 6, 2006
In other words, as a saver or investor, you’re earning interest on the interest, or ‘compounding’ your returns. Five years later, you would have earned $350 in withdrawals instead of $403 in compound interest (assuming a 7% return each year). After 10 years total, taking the returns each year without compounding would earn you $700. Letting your investment earn compound interest would result in a gain of $968. Compound interest is when you earn interest on both the money you’ve saved and the interest you earn.
If you don’t pay the interest charges within the period stated in your loan, they’re “capitalized,” or added to your initial loan balance. Albert Einstein said, “The most powerful force in the Universe is compound interest.” He referred to it as one of the greatest “miracles” known to man. Compound interest is interest added to the principal of your investment so that from that moment on, the added interest also earns interest.
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Compounding is often compared to pushing a snowball down a hill. As it travels down the hill, the snowball continually picks up more snow. The bigger it gets the more snow it gains on each rotation. The so called “snowball effect” shows that small actions continued over the long term can have large impacts. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Snow needs to be continually added, with an almost intense effort. Old Grandpa Rockerfeller the multi-millionaire who preached thrift said something I what is cash flow and why is it important never forgot. He said, “The 8th wonder of the world is compound interest.” Unfortunately very few people understand the magic of compound interest.