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

einstein compound interest

But what if Dad were nearly as good an investor as Warren Buffet who averaged a 21.5 percent annualized return? Hold onto your hat, June, because a 20 percent annualized return would have turned the $6.11 into $351.4 million. That’s enough to buy a small island for the birthday celebration, or just about anything else she or her family could want. It will also allow me an opportunity to come clean on my use of this quote. To estimate the number of periods required to double an original investment, divide the most convenient “rule-quantity” by the expected growth rate, expressed as a percentage. Albert Einstein once said “Compound interest is the eighth wonder of the world.

einstein compound interest

The good news is that you can feel the power of compound interest simply by paying money into a savings account and patiently letting it grow in value, year after year. Many people will go out and max out that $12K limit that I mentioned and simply just make minimum payments on that card which are typically 3% or so. So let’s pretend that’s exactly what I did rather than correcting my actions. Andrew has always believed that average investors have so much potential to build wealth, through the power of patience, a long-term mindset, and compound interest. The kind of time that young people have today to compound their investments makes old hedge fund cats salivate. That’s why they are looking for the fountain of wealth.

Using the rule to estimate compounding periods

“One-hundred dollars invested at the end of 1925 would be worth $9,229 today if you had spent the dividends, but $299,395 if you had ploughed them back into your portfolio.” Now if Dad had invested it in the stock market and averaged 10 percent annually, June would be pocketing some real money – $69,586 – and could do a whole lot better than a dinner. Maybe take the family on a nice first class vacation, for example.

  • Einstein didn’t just say that it was pretty cool or good in some way; he said it was the most powerful force.
  • At first, the amount of force and energy to create a snowball must be great.
  • Amid the booming of cannon, the shrill whistling of a thousand steamers and the plaudits of great masses of citizens the Brooklyn Bridge .

Let’s assume two different investors that are the exact same age. At that point, you are earning more in interest each year than you initially invested. Let’s use the example above and assume you earn 10% for 10 straight years. That’s a BIG rate of return, but it keeps the numbers round. I should have STARTED with compound interest!

I know it’s a total mind blow but here is the take away:

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. If we need to consider more than one year, n will be equal to m multiplied by the number of years we consider. Interest rates are the cost of borrowing money. If you are the participant lending out the money, you receive the interest. If you deposit money in your bank account, it is similar to “lending” money to the bank and therefore you receive interest on the amount you deposit. First, the yield, which is calculated as the dividend payout divided by the market valuation of the company.

That example might seem outlandish but it’s really not. Believe it or not, you can actually save $5K/year with just a few simple tweaks in your daily life. For the first couple years of my investing journey, I really didn’t fully comprehend what he was meaning when he said this.

Did Einstein ever remark on compound interest?

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. If you want to go out and buy something fancy on a credit card, that’s fine – but pay that thing off. Fortunately, I had gotten business advisor job description the $12K balance down to about $8K before the interest came into play, and I continued to pay it off aggressively after that, but many people don’t do that. You earned $11 on $110, so you have $121 at the end of year 2. You earned “interest on interest, which means you are earning a little more each year.

einstein compound interest

Nobody makes a real fortune overnight, and nobody goes broke in one night either. The exceptions to the rule regress back to where they should be over time. That’s why lottery winners oftentimes end up broke years later.

Albert Einstein and Compound Interest

Even so, the truth behind the quote remains rock solid, making it worth considering, no matter who said it first. Einstein knew this ‘8th wonder’ was something we can all use to help us build wealth. Over time, this process can turn a small amount of money into a big amount. His ideas on compound interest can provide us with valuable lessons on money matters. On top of that, he had a knack for simplifying complex concepts, making them understandable for all. Einstein was a remarkable physicist and mathematician.

People who understand compounding interest.

He went on to state that those who understand it, earn it and those who don’t, will pay it. It is therefore important to understand what interest is, where compounding interest fits in and how to use it in your everyday life. Manage your portfolio carefully to ensure the taxman isn’t taking a cut of your annual dividend income. This is less of a problem if you hold your money offshore, but you may need to seek tax advice. When company profits are growing, they raise their dividends to reward investors.

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