"Compound interest is the most powerful force in the Universe"
"Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."
NERD WORD ALERT
Compound Interest: Earning interest on interest, over time.
“Compound Interest is The Most Powerful Force in The Universe.”
This famous quote from Albert Einstein speaks to the significance of compound interest as a financial concept. Those are strong words from someone who most people consider a credible source on math-type stuff.
Compound Interest is one of the most important financial concepts to understand. Once you understand what compound interest means, it can change your perspective on money and investing.
What is Compound Interest?
Interest: Money paid or received as compensation for depositing or loaning money.
Compound Interest: Earning interest on both your initial investment, but also your previously earned interest, over time. If an investment is left alone and continues to “compound” – it will earn a little more each year.
We have a blog post dedicated to compound interest here: Compound Interest: Taking Einstein for Granted.
The concept is best learned through examples. If you are teaching yourself or your kids (or someone else's kids), consider using the examples in our blog post linked above.
You can also consider the example below, which shows the importance of SAVING EARLY!
How powerful is compound interest?
The illustration below shows examples of TWO SAVERS.
Person 1 starts saving at age 18 and stops saving at 30.
Person 2 starts saving at 31 and never stops.
Compound interest is so powerful, Person 2 NEVER catches Person 1.
Click here to SEE the math for yourself.
CLICK HERE to download an Excel Spreadsheet with this and other Compound Interest examples built-in to show your kids (and yourself).
You can also use our interactive calculator below.
THIS IS A HYPOTHETICAL EXAMPLE, AND DOES NOT EXPRESS ANY PARTICULAR INVESTMENT. IT IS SHOWN TO ILLUSTRATE THE POWER OF COMPOUND INTEREST.
THIS EXAMPLE ASSUMES 6% INTEREST EARNED EACH YEAR ANNUALLY FOR THE TERMS DESCRIBED.
EMAIL US IF YOU HAVE QUESTIONS OR NEED HELP UNDERSTANDING!