The Wonder of Compounding Interest

A pretty smart person (Albert Einstein) once said, “Compound interest is the 8th wonder of the world. He who understands it, earns it… he who doesn't… pays it.” Let’s see why one of the smartest people in the world thinks so highly of compound interest, and why it is vitally important to investing.

What you need to know...

  • Compound interest allows normal people to build significant wealth.
  • Start investing early! Even modest interest rates can earn a lot over time.
  • Money today has the potential to be worth a lot more in the future.
  • Without the help of compound interest, almost no one could save for retirement.

If there is a single concept about personal finance that we would encourage everyone to understand: This is it!

Compound interest plays a critical role in our pursuit of financial independence, and is the key to building real wealth and security for our future.

So let’s try and understand why someone as intelligent as Mr. Einstein believes compound interest deserves to be mentioned in the same breath as the Pyramids.

Breaking it down

It all comes down to something that is familiar to most people: the snowball effect

All this means is that money you earn from interest, earns you interest the next time around. This simple concept can have profound impact though.

Take for example the option to get $1 million right now, or a penny that doubles in value every day for a month. A lot of people might immediately say, “Give me the million!”.

Not so fast though. Compounding interest will turn that penny into $5.4 million in 30 days, because each day it doubles what the previous day’s value was.

Loading...

In this example the interest is 100% per day, which unfortunately isn’t realistic. But even with interest rates of 7% per year (a more reasonable rate), the snowball effect can be dramatic.

This means that money today has the potential to be a lot more money in the future. And the earlier you start investing, the more it will be worth!

It also means that if you’re not earning interest at the “market” rate, you’re losing money in comparison. We call this an opportunity cost, a concept that simply answers the question “could my money be earning more interest if it were invested elsewhere?”. Opportunity cost is something that we use across Previsio’s platform to help make suggestions on where you should focus your effort.

Look below to see how compound interest completely changes the game when it comes to your own retirement savings.

Loading...

Without compound interest, the selected persona would need to save cents of every dollar they earned, for retirement. But with interest they only need to save cents of every dollar of their take-home pay... You tell me that isn’t a wonder!

Beyond compound interest

Compound interest and investing are just one stop on the complex, and sometimes overwhelming journey through your financial life. If you have no idea what to do, or just want to let someone else to do the heavy lifting, we're here to help! We'll work together to create a personalized lifestyle plan that will help you do more of the things you want to do now, while we make sure your future is secured. Learn more about what it means to create a Lifestyle Plan with Previsio.

Join us!

Disclaimer:
Previsio, Inc. is a technology company. Analyses, tools, articles, and any other information or data presented on this website is for informational and educational use, and should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.

Previsio does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. To the maximum extent permitted by law, Previsio disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

Content contained on or made available through Previsio website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.

Copyright © 2020 Previsio, Inc. All Rights Reserved