10 Reasons why Compounding Interest is the 8th Wonder of the World

Regardless of how much you make, the sooner you get started the better the 8th wonder of the world will start working for you—and a penny saved today could mean millions in retirement. Now if you are like most people, at first you might jump on the million dollar deal. 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. 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.

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 figures calculated so far discount a scenario in which the S&P500 each year grows by about 10%, but the reality is quite different.
  • Dozens of other underage girls described similar sexual abuse, but prosecutors ultimately allowed the financier to plead guilty in 2008 to a charge involving a single victim.
  • 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.

After all, dividends are uncertain, and history is full of major companies that have been forced to cut them. Better to focus on dividend growth companies rather than high-yield companies, but even here a fairly long time frame is required. The distribution strategy will not make you rich since you must already be rich to live off dividends. In short, a goal that is not for everyone and still takes a lot to achieve. The distribution strategy is to receive steady, short-term cash flows issued by companies in the form of dividends. The goal is to get the first benefits from our investment but sacrifice some of the capital gain.

Did Einstein ever remark on compound interest?

Probably some readers of this article live a more luxurious life than Warren Buffet and do not even envy him. It’s all a matter of predisposition, and if you want to achieve huge sums through accumulation you must pay a high price. In short, the timing of position closure is a crucial aspect and one that could radically change the return on your investment. Finally, staying on topic, the yield calculated above is nominal.

  • Also, the return taken into account is the average return, so it is possible that when we plan to sell the position, the return on the investment will be different.
  • Hold onto your hat, June, because a 20 percent annualized return would have turned the $6.11 into $351.4 million.
  • That being said, the market almost never returns anything near the average.
  • Everyday, we have people who live in a mindset of scarcity instead of abundance.

There is a lot of wisdom to the adage, though, in defence of timing, get it right and you gain significant advantage. QI hypothesizes that the statement was crafted by an unknown advertising copy writer. Over the years it has been reassigned to famous people to make the comment sound more impressive and to encourage individuals to open bank accounts or purchase interest-bearing securities. Maurie Backman is a personal finance writer covering topics ranging from Social Security to credit cards to mortgages. She also has an editing background and has hosted personal finance podcasts.

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I believe in you, my fellow freedom fighter because I know you can make a difference. Why is compounding interest a greater teacher of patience? In fact, compounding interest is actually pretty boring, it can be like watching paint dry. Compounding interest doesn’t care about your race, gender, or age. Compounding interest affects everyone the same, because it depends on time.

Compounding interest lets you sleep good at night.

Growing up, I would hear “even Magic Johnson practices dribbling and passing every day”. The same thing applies here, even if you’ve heard it before, let’s take another look at THE POWER of Compound Interest. Even with all that fanfare for the topic, I’ve been guilty of neglecting to properly cover when discussing financial literacy. I’ve found I take for granted that I was taught the power behind compound interest at a young age.

A penny that doubles every day would be worth over five million on day thirty. If I offered you a million quid upfront, or a magical penny that doubles in value every day for 30 days, would you take the million quid? The Ascent is a Motley Fool service withholding tax definition that rates and reviews essential products for your everyday money matters. Compound interest is the concept of earning interest on interest. Let’s say you put $100 into a savings account and that balance grows to $105 by virtue of earning interest.

Compounding interest can create millionaires from average people.

He who understands it, earns it; he who doesn’t, pays it”. While some people question whether the quote was in fact from Einstein, the power of compound interest is unquestionable. So, since time is the key to compound interest, the accumulation strategy is more suitable for young people but could also make sense for those who are years old. We all know that by investing $300-$400 per month for years in an accumulation ETF that tracks the performance of the S&P 500 we can become wealthy, but how many actually do it? How many are truly willing to have such a long-time horizon?

Let’s say you invest $500 a month in a brokerage account over a 20-year period. All told, you’re sinking $120,000 into your account, which is a lot of money. But if your investments during that time generate an average annual 8% return, which is below the stock market’s average, you’ll end up with about $275,000. In investing, compounding is simply the concept of earning a return on your previous returns. A quick example is that if you invest $1000 for one year at a 10% return you will have $1100 at the end of the year. After earning this $100 you decide that you want to do the same thing for the next year and reinvest your principal ($1000) and return ($100) and earn 10% again.

Einstein Said Compound Interest Is the 8th Wonder of the World. Why Graham Stephan Thinks That’s Right

Not only are you paying it to the bank, but you’re paying it to your employer because now you’re going to have to work even longer to be able to fund your retirement. Imagine this scenario – you’re 35 and you start to implement this change where you’re going to save $5K/year until you’re 50. For clarification, n will be the same as m if we are just converting nominal interest rate to effective interest rate during a one-year period.

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. 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. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

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