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The 8th Wonder Of The World

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You’ve heard of the 7 Wonders of the World, but what about the 8th?  Albert Einstein, one of the smartest people to ever live, said that this was the most powerful force in the universe.  That most powerful force is COMPOUND INTEREST!!!  Einstein said,

“Compound interest is the 8th wonder of the world.  He who understands it, earns it; he who doesn’t, pays it.”

Let’s learn about compound interest and if what Einstein is saying holds any water.

Definition:

According to Wikipedia

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

Simply put, you earn interest on some money you have saved, but don’t withdraw the interest.  You leave the interest in, adding to the principal, earning even more interest the next period.  It just grows and grows!!!

A Simple Example

Let’s say you invested $10,000 at 8% interest.  If you left the interest in and let it compound over time, here is how the growth would look for the principle compounded annually:

1st year:  $10,800

5th year:  $14,693

10th year: $21, 589

By simply leaving the interest in and letting it compound, you’ve more than doubled your money in 10 years.

A Crazy Example – A Penny Doubled Every Day

There was a story of a rich old man offering his sons a choice.  He would give them a million dollars right now, or give them a penny a day, for 30 days, doubling the amount every day.  The first son immediately chooses the million dollars, believing he made the best choice.  He wouldn’t have to wait for 30 days for a payout of a penny doubling scenario.  The 2nd son decided on the penny a day, doubling each day for 30 days.  This is the equivalent of 100% interest on the principle daily.  Let’s see what a penny doubled every day will do:

Day 1: $.01

Day 2: $.02

Day 3: $.04

Day 4: $.08

Day 5: $.16

Day 6: $.32

Day 7: $.64

Day 8: $1.28

Day 9: $2.56

Day 10: $5.12

Day 11: $10.24

Day 12: $20.48

Day 13: $40.96

Day 14: $81.92

Day 15: $163.84

Day 16: $327.68

Day 17: $655.36

Day 18: $1,310.72

Day 19: $2,621.44

Day 20: $5,242.88

Day 21: $10,485.76

Day 22: $20,971.52

Day 23: $41,943.04

Day 24: $83,886.08

Day 25: $167,772.16

Day 26: $335,544.32

Day 27: $671,088.64

Day 28: $1,342,177.28

Day 29: $2,684,354.56

Day 30: $5,368,709.12 

As you can see, the penny doubled each day is the big time winner.  Sure the growth is pretty boring in the first couple weeks, but gets more exiting around Day 18.  Then Day 21 even more exciting with Day 25 and higher with amazing compounding.  This is the power of compounding interest.

The Takeaway

Compound interest is truly a powerful force when it comes to earning money.  Simply leaving accrued interest in an account to be compounded from month to month, year to year, with patience, can result in very large gains over long periods.  Though this is awesome, leaving money in an account, untouched for long periods of time is easier said than done.  To put $10,000 in a savings and not touch it for 10-20 years or more can be extremely tough.  You may doubt yourself and find moments of weakness where you are battling the desire to take it out.  But patience is a virtue, and compound interest is a force.   Let it work for you and make you rich.  Be patient and let compound interest set you free.

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