No attribution was provided, and anonymous advertising copy writers have applied the “eight wonder” label to a wide variety of objects and ideas for more than two hundred years. QI has found no substantive evidence that Albert Einstein, Baron Rothschild, or John D. Rockefeller employed the saying. 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. FYI – Robbins’ exact line was “Compound interest is such a powerful tool that Albert Einstein once called it the most important invention in all of human history.”

• Compound interest is the most powerful force in the universe.
• Over time, this process can turn a small amount of money into a big amount.
• Let’s take a look at how we put these into our formula…
• Let’s assume two different investors that are the exact same age.

Have you ever wondered at what makes an avalanche so powerful? A force so massive actually starts from a very small place. Before an avalanche can smash trees and break legs, it needed to become a snowball first, and 22 small business tax deductions checklist for your return in 2023 a piece of snow before that. Don’t do something as boneheaded as what I did where I was treating myself to something that I really shouldn’t have ever done. Even though I paid off the loan, I was lucky to do so.

Why Albert Einstein loved compound interest

It usually returns much higher or much lower than 10%. These big swings can make it very difficult for investors to stay invested and actually earn the high return, but that is a conversation for another time. Almost everyone focuses more on the rate of return than on the length of time for which their capital will be invested. “Buy right and hold tight” is a slogan adopted by some of the world’s most successful investors. In addition, you’re going to have a MASSIVE opportunity cost.

Thanks to the power of compounding, you’d earn $34,370 in the third decade compared to $26,612 in the first two decades – that’s 29 per cent more money in half the time. Andrew has always believed that average investors have so much potential to build wealth, through the power of patience, a long-term mindset, and compound interest. When’s the last time you saw a high interest credit card balance move much lower after making a payment?

Einstein and the magic of compounding

The more often compounding occurs, the higher the effective interest rate. Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. 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.

• Amid the booming of cannon, the shrill whistling of a thousand steamers and the plaudits of great masses of citizens the Brooklyn Bridge .
• The Ascent does not cover all offers on the market.
• That example might seem outlandish but it’s really not.
• This isn’t the world I want my daughter to grow up in.
• Note that if you wish to calculate future projections without compound interest, we have a
  calculator for simple interest without compounding.

Before we get too far into the weeds, let me first explain what compound interest is. The concept is that when you earn interest in X amount of time, that next time period you’re going to earn interest on the principal AND the interest that you previously earned. Basically you’re double dipping on return on your investments. That being said, the market almost never returns anything near the average. Only 6 times in that span has the market returned between 5% and 10%.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

My $500 in the market has just as much of a chance at making 10% returns as George Soro’s $500 million. Sure he may have more opportunities than I do, but in any stock market security – pound for pound – we have an equal shot. This can be done quite simply by opening a brokerage account, picking a S&P 500 ETF like SPY and then investing that money.

But watch what happens if you shrink your investment window to 10 years. 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. Sometimes a comment is attributed to a famous individual to increase the prestige and believability of the comment. Also, a quotation from a famous person is often considered more interesting and entertaining. Thus, at the end of 10 years, you will have to repay a total of R8,235.05 (the principal of R5,000 plus the interest of R3,235.05).

How to calculate compound interest using the formula

It might not seem like you would save a ton of money, but you can pretty easily pack a very hearty lunch for $3, and then your savings for just that one lunch is $9. Perhaps it prevents you from signing up for a high interest credit card. Investor 1 saves $1,000 per year from age 18–30 — then STOPS SAVING FOREVER. I had taken it for granted that this room full of grown-ups understood what it means when we say, “compound interest is the most powerful force in the universe”.