Compound Interest: Taking Einstein For Granted by J. J. Wenrich CFP The Startup

The longer you invest, the more important dividends become. “For the seriously long-term investor, dividends are where the action is,” he says. 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.

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. Take the previous example – after five years, you’d not only be earning interest on your original $1,000 investment, you’d also be earning interest on your $403 of interest. He said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. 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.

  • At that point, you are earning more in interest each year than you initially invested.
  • Einstein was a remarkable physicist and mathematician.
  • 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.
  • Now, just for fun, imagine in the above example that each period represented a year instead of a day.
  • If you spent all your dividends, it would be worth £22,239 in today’s money, according to the long-term Barclays Equity Gilt study.

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. The above example of doubling a dollar a day may sound unrealistic. However, in the real world, many do expect to have their investment returns double within a short period of time But the fact remains, the higher the potential returns, the higher the risks.

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After a year, if you don’t pay anything back, you’ll owe $180 in interest, making your total debt $1180. Now, what if this interest starts to earn its own extra money? So if you are telling yourself that you will put aside money for tomorrow “when you can afford to” or “when you make more money” or whatever, you are putting yourself at a huge disadvantage.

One of my favorite compound interest examples that I like to use is the power of making small changes in your everyday life and then sitting back and watching the money compound like crazy. To me, the #1 easiest change to implement is simply to stop going out and buying lunch every single day at work. 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.

Albert Einstein > Quotes > Quotable Quote

With compound interest working against you, those payments would retire a debt of $200,000. With it working for you, they would grow to over $900,000. When we use the term “compound interest” in the investing world, we’re not really even usually talking how to create a profit and loss statement about interest but rather the gains/returns that we might receive from our investments. On the other hand, compound interest really does apply to when we’re paying it because it’s usually because we’re working to pay off some massive debt.


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. That’s why it’s in your best interest to start investing from as young an age as possible. And the longer you give yourself to benefit from it, the wealthier you stand to become. And it’s something you should aim to take advantage of.

Did Albert Einstein declare compound interest to be ‘the most powerful force in the universe’?

The label “eight wonder” was applied to compound interest in an advertisement for a bank in 1925. 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.

The Eighth Wonder of the World – Compounding Interest

This year instead of earning $100 dollars you earn $110. The 10 extra dollars are due to compounding as you have earned a return on your return. This doesn’t seem like very much but the secret with compounding is to amplify it by investing for long periods of time.

Albert Einstein – Compound interest

So you’d earn more money in the last 10 years than in the first 20. After 10 years, your original $1,000 would become $2,010. That means your annual interest would be $1,010 – more than your original investment. The longer you leave your money untouched, the more powerful the compounding effect becomes.

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