By Frank Conway
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
OK, just be warned, despite the quotation from Mr. Einstein, this is NOT going to be a complex maths lesson, it is going to be a simple money lesson.
But first, what exactly is compound interest? Well, put simply, it is interest-paid-on-interest and it can really can work wonders for you!
Compound interest has very positive and negative consequences but for now, let’s focus on the positives of how it can work wonders for your personal finances.
Einstein’s Rule of 72 shows how long it will take to double your money, based on an anticipated interest rate. It’s really easy to figure out and super-important to understand. If you were to earn a 4% return on your money, it would take 18 years to double your money (72/4=18). If you can earn a higher rate of return on your money, the time to double your money shortens proportionately.
“So what” you might ask. Where the rule of 72 comes into play for you? Well, that’s easy.
Time and your ability to earn income are incredibly powerful. Let’s say you’re a college student and you invest €10 a week while in college and earn a 6% rate of return that compounds annually. At the end of 4 years, you’d have €2,158! But let’s say you decide to continue investing just €10 a week for the rest of your life until you retire at age 68 (that’s a total of 49 years, assuming you start at age 19, would have turned into €134,603. To put this in perspective, you actually saved €23,501 but the power of 6% interest compounding each and every year meant that your savings grew exponentially over time. And all for just €10 per week!
So spare a thought for Mr. Einstein and his Eighth Wonder of the World, it can really work wonders for you!