Albert Einstein is presumed to have said, “Compound interest is the eighth wonder of the world.”
I read that in 1626, Native Americans sold what is known as Manhattan in New York City to white settlers for what equated to $24. Now fast forward, today Manhattan’s land value is appraised at $23.4 billion. Today, many observers would most likely be quick to condemn the “abusive White Man” and his scam on the naïve Native Americans. However, had the Natives placed that $24 cash in a 6% compound-interest account, that same $24 would have compounded to approximately $28 Billion today!
If you invest a sum of money at 10% over five years, you will multiply your wealth by 1.6 times.
If you invest your capital at a rate ten times as long (50 years), you will not multiply your wealth by 16 times.
You will multiply it by more than 117 times.
The most challenging aspect of the compound effect is that we have to keep working away for a while, consistently and efficiently, before we can begin to see the payoff. As the old story goes: 1 cent that keeps doubling each day for 30 days will exceed $1million, but yet after 14 days, the effort seems meaningless because the actual compounding has not yet kicked in.
Compounding is the base principle in everything we do in life. Little, everyday decisions will take you either to the life you desire or to disaster by default.
Compound interest is more than a financial term! It is a concept that affects everything you do in life: A very close friend of mine decided to cut out sodas from his diet – a seemingly minor adjustment or sacrifice. However, with the compounded interest of drinking fewer calories each day, he lost more than 45 pounds over two years.
Conditioning your children early in life to make smart decisions, to not spend their entire allowance on meaningless toy figurines or video games, but to teach them early that for every $10 they receive in their hands, $2 goes into savings even though it is still their money. It is Pavlov’s law; if your kids do not know any better, soon, as their money starts to compound, it will become a very healthy habit that will serve them well as the foundation to a life without financial worries regardless of their vocation.
As a young boy, working at the family tomato farm and just starting to make my own money, I remember my dad pulling me aside and telling me the following: I don’t care how much money you will manage to earn per hour in your life – it doesn’t really matter! What matters is that you always put 20 cents aside for every dollar you make!
Condition yourself to Tithing 20% of your earnings to yourself, and over time, you will never worry about money again! Some of our best intentions fail because we don’t have a system of execution. One good strategy that has served me well is to pay yourselves first, pull that 20% aside into your investment account. Your new behavior must be incorporated into your daily routines to affect any real long-term change. The compound effect will become an unstoppable force in your life.
Using this proven concept would reversely also quickly get you out of debt since any bad debt will also compound negatively over time. If not addressed, it potentially makes you a “financial slave” to your creditors for life. The current US economy is a scary example of such debt spinning out of control when a country manages to spend more money each year than its total GDP, or simply put, you spend more each month than your paycheck.