The Power of Compound Interest (what Einstein knew that you didn't?)
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The World's Greatest Minds Believe in the Power of Compound Interest.
Invest a little for a long time and you end up with a lot..
You can say it flashier with bigger words - but that's the bottom line about compound interest..
Even the acclaimed genius of the last century, Albert Einstein, listed compound interest (not his Theory of Relativity) as the greatest force in the universe. So how do you get this power working for you?
Like Granddaddy told you, it's about consistency. If you wait until you have a large sum of money, you miss the chance to double that amount with compound interest. Another tried and true investment principle, dollar cost averaging, tells you to save a set amount each month.
Don't try to play the market or predict interest rate swings. It really doesn't matter. Send $100 a month to your savings faithfully and in forty to fifty years, you're a millionaire. People who say, "I can't afford to save for retirement or college for my kids until I make more" are fooling themselves.Save a little, save regularly and let compound interest make money for you.
Forget the get rich quick hype about options and stock trading. That's for the pros - and even they lose their shirts frequently. Be the tortoise. Move forward at your own pace with your regular monthly savings. At the end of the race, thanks to compound interest, your money safely doubles.
Let's Look at a True Example of How Compound Interest Works:
Which one would you choose - a penny doubled every day for 30 days?Or a $1,000 a hour, 24 hours a day for 30 days.?
Sounds like an obvious choice, right?
Well lets take a look at the first week:
$1,000 and hour for 24 hours is $24,000 a day.
And there are 168 hr in a week, so that makes it $168,000 for the first week.
Now let's look at the penny tally:
1 day = 1 cents
2 day = 2 cents
3 day = 4 cents
4 day = 8 cents
5 day = 16 cents
6 day = 32 cents
7 day = 64 cents
That's 64 Pennies in the first week. (Sounds disappointing, doesn't it? Read on...)
Let's finish the $1,000 an hour option:
24 hours x 30 days = 720 hours in thirty days.
That will be $720,000.
You might be saying, "I'm so glad I picked the $1,000 per hour choice!"
What if I said the penny would add up to a lot more than a million dollars - how about 2, 3, 4, or more than 5 million dollars!?
I know, you probably think I've lost it, right?
You see, Albert Einstein was so amazed at the power of compounding interest that he declared it to be "The most powerful force in the universe."
Here, let me show you what he meant:
8 day = 1.28
9 day = 2.56
10 day = 5.12
11 day = 10.24
12 day = 20.48
13 day = 40.96
14 day = 81.92
15 day = 163.84
I know - I said it was going to be over $5,000,000.
We are halfway there and all I got up to was $168.84 - that's not even one hour of the other
option!
Let's just keep on going, okay?
16 day = 327.6817 day = 655.36
18 day = 1,310.72
19 day = 2,621.44
20 day = 5,242.88
21 day = 10,485.76
22 day = 20,971.52
23 day = 41,943.04
24 day = 83,886.08
25 day = 167,772.16
26 day = 335,544.32
27 day = 671,088.64
28 day = 1,342,177.28
29 day = 2,684,354.56
And last but not least...
30 day = $5,368,709.12
You see? I said it was over 5 million dollars!
What is the purpose of this short puzzle?
I want to show you how powerful compounding can be!
STARTING WITH A PENNY IS GOOD WHAT ABOUT A 100$
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To get a better handle on your money, read this book:
Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not!
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Release Date: 12/31/1969
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Compound Interest - Explained!
Compound Interest Calculations - Start Saving Now for Big Rewards Later
Before you know it, those darling babies are in elementary school. You talked about saving for their college expenses, but there was always something to buy or fix. With ten years until college, is it too late?No! It's never too late to benefit from compound interest!
To make the most of your savings, set up accounts for each child. That way, compound interest continues to build a fund for the second child while money is being used for the first child in college.
Set up a monthly automatic withdrawal from your checking account or paycheck if possible into each child's college savings account. Regular deposits get the most benefit from compound interest.
Remember to add extra money to these accounts such as gifts from the grandparents or an unexpected bonus check. Maybe the family could work together on yard sales or other projects to add to these funds.
An extra $1,000 a year would really kick up the impact of compound interest earnings. Resist the temptation to take a few hundred here and there from designated savings. This puts the brakes on the dramatic growth of compound interest.The fact is, compound interest is as powerful today as it was for your grandparents. The problem is, we have turned into a consumer driven society that wants everything now, even if debt is the price.
Savings takes planning, consistency and vision. Say no to the flatscreen TV to see a better picture later - your child graduating from college debt free thanks to your clear understanding of how compound interest works!
Interest Rate Models for Studying Compound Interest
Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
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Aside from Investing Early, You Should Invest Often to Maximize Compound Interest
Your Key To Financial Freedom
Depositing that $10,000 inheritance from Aunt Mavis in a savings account as your retirement fund and forgetting about it isn't a bad strategy - but it's not the most productive choice because it doesn't maximize your compound interest!Granted if you let compound interest keep churning, you'll end up with a nice nest egg in thirty to forty years. It will help you retire in a nice little cabin by the lake. Not a bad deal.
If you take that same $10,000 inheritance and invest in a high quality mutual fund, you'll retire to a luxury house on the lake and fish from a fully equipped bass boat instead of a canoe.
Which retirement style would you choose? If the lake house (not the cabin) is your choice, then you have to choose wisely when placing the initial investment. The bank savings account is secure, but stodgy.
Aunt Mavis liked visiting the bank and drinking free coffee. The bank could afford it because they earned more from her money than she did! Buy your own coffee and invest in mutual funds.
With a longer horizon, 30-40 years, your mutual fund will dramatically outperform the savings account. With compound interest and growth of your mutual fund, you can retire a millionaire instead of having a few hundred thousand to fall back on.You have the advantages of market changes with professional fund managers to watch over your money.
Unlike the banks, mutual funds only make money when you make money, so you can bet they pay attention to your best interests.
Compound Interest According to Wikipedia:
Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding (i.e. the interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 initial principal and 1% interest per month would have a balance of $101 at the end of the first month, $102.01 at the end of the second month, and so on.
In order to define an interest rate fully, and enable one to compare it with other interest rates, the interest rate and the compounding frequency must be disclosed. Since most people prefer to think of rates as a yearly percentage, many governments require financial institutions to disclose the equivalent yearly compounded interest rate on deposits or advances. For instance the yearly rate for the loan in the above example is approximately 12.68%. This equivalent yearly rate may be referred to as annual percentage rate (APR), annual equivalent rate (AER), annual percentage yield, effective interest rate, effective annual rate, and by other terms. When a fee is charged up front to obtain a loan, APR usually counts that cost as well as the compound interest in converting to the equivalent rate. These government requirements assist consumers to compare the actual costs of borrowing more easily.
For any given interest rate and compounding frequency, an "equivalent" rate for any different compounding frequency exists.
Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding). Compound interest is standard in finance and economics, and simple interest is used infrequently (although certain financial products may contain elements of simple interest).
Now Do You See the Power of Compound Interest?
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- Oldbuddy Oldbuddy Oct 29, 2009 @ 6:34 pm
- First the 5 Million was the interest earned on day 30, but total all the interest earned day by day and it's over 10 Million, right? Then if you compound it daily instead of on an annual basis like the banks do, it doesn't take nearly as long to see the results like my Daily Compound Interest Calculator shows.
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- Nimrod Dsouza Nimrod Dsouza Oct 30, 2008 @ 10:14 pm
- Im planning to use the great einstein theory...to go to million dollars soon :P
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- TAE KAYO TAE KAYO Jul 26, 2008 @ 10:02 pm
- So suck, fuck!
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- Stephene Stephene Mar 16, 2008 @ 11:32 am
- very useful information.. i like your lense very much.. i hv bookmarked this lense and joined your fan club.. (^o^)
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- SemperFidelis SemperFidelis Mar 14, 2008 @ 7:52 pm
- Blessed by a Squid Angel today! :o))
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