Discovering the Magic of Compound Interest with Einstein!

September 18, 2023

Discovering the Magic of Compound Interest with Einstein!

Welcome to another fun edition of our weekly newsletter! Today, we're exploring the amazing world of compound interest, inspired by the brilliant Albert Einstein. Yes, the man known for his theory of relativity also appreciated the power of compound interest. He famously said:

What is compound interest?

Simply put, compound interest is interest earned on interest. When you invest or save money, you earn interest on your starting amount (called the principal). With compound interest, you also earn interest on the interest you've already made. The magic happens when your interest keeps growing and growing, like a snowball rolling down a hill!

As Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." This means that if you invest your money smartly and understand how compound interest works, you can make a lot of money over time. But if you don't understand it, you could end up paying a lot of money in interest on loans and credit card debt.

How does compound interest work?

Imagine you invest \$1,000 at a 5% yearly interest rate. After the first year, you earn \$50 in interest (5% of \$1,000). So, your total becomes \$1,050. Here's where the magic begins! In the second year, you earn 5% interest not only on the original \$1,000 but also on the \$50 interest you made in the first year. So, you earn \$52.50 in interest, making your new total \$1,102.50. This process keeps going, and your money grows faster and faster!

Compound interest loves time. The more time you give it, the stronger it gets. Let's say you invest that same \$1,000 at age 20, and you don't touch it until you're 60. At a 5% yearly interest rate, your investment would grow to an impressive \$7,040! But if you wait until you're 30 to invest, your final amount would only be \$4,322. Wow! That's a huge difference, just because you started 10 years earlier.

Tips to make the most of compound interest Here are some easy tips to help you take advantage of compound interest:

Start early: The sooner you begin, the more time your money has to grow.

Invest regularly: Make consistent contributions to your investments, even if it's a small sum.

Reinvest your earnings: Allow your interest to work for you by reinvesting it instead of spending it.

Be patient: Compound interest is a long-term game. Stick with it, and you'll be amazed at what it can do for you.

And that's it, Finance Friends! Compound interest is truly a magical force in finance. Just remember Einstein's wise words, and make compound interest work for you. However, it's important to note that Einstein didn't have to worry about sharing information in a way that would be approved by a compliance officer. With that in mind, nothing in this newsletter is meant to guarantee that you'll become rich due to compound interest. Our goal is simply to help you understand and appreciate its potential power. Now, go out and harness the power of the "eighth wonder of the world" – but always make sure to do so responsibly.

Examples of compound interest are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Author: Anthony Owens