Albert Einstein was simply fascinated by this topic: Compound Interest. The term is one that we have all heard of and think we understand, but until we see the power of compound interest at work within our own finances, I don’t think we truly understand it’s power! Although I can’t magically give your savings a taste of compound interest at this moment, I can show you the effects within a neat looking chart (I know, not quite as effective). But please, play along as we take a look. It could change your life.
Have a gander at the table to the left. I have set up a scenario where there is a “non-investor” and an “investor at 12%”. The “non-investor” saves $5,000 every year and stuffs the money under his mattress for safe-keeping. The “investor” also saves $5,000 every year, but he finds a way to make 12% interest on his money (this % interest is often accomplished with mutual funds or real estate investments). They both start at age 25, and after the first couple of years, the chart doesn’t really look that impressive for the investor. Sure, he has more money, but only by one or two thousand dollars. Judging by the initial comparison, you may think that the investor comes out ahead by $50,000 or so after 40 years. Not true. By now I’m sure that you’ve already scrolled to the bottom of the table and discovered that the investor’s money has grown to $4,300,711.95, where the non-investor has a whopping $205,000… Let’s say we extend the time frame to 50 years, the investor now has $13,445,102.186 compared to the non-investor’s $255,000. Now do you understand why Albert Einstein called Compound Interest the Eighth Wonder of the World?
This concept alone will fascinate me all of my life. It’s always been my inspiration for getting out of debt and investing. Hopefully it inspires you as well. Take a look at your personal finances and make sure that you are on track for your future goals. Even though it may take years of patience, do not forget to implement the power of compound interest! It will most certainly pay off in your future.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.