Compound Interest: The 8th Wonder of the World
- Brainz Magazine
- Mar 30, 2021
- 3 min read
Updated: Mar 31, 2021
Written by: Jennifer Gattinger, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Machu Picchu in Peru, the Colosseum in Italy, the Great Wall of China.
Chances are that you’ve heard of the Seven Wonders of the World and maybe even had a chance to visit a few of them.
Now, what about the 8th Wonder of the World?
According to Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it.”
So, what is compound interest, and just what makes it so powerful?
Compound interest is interest earned on interest. In other words, the interest you earn on your saving or investment account’s balance is added to the balance and reinvested on a monthly or yearly cycle. This, in turn, allows you to earn even more interest.
Let’s take a look at an example. Imagine that you have $10,000 in your investment account that earns 7% interest (conservative average annual return on investments). At the end of year 1, you would have earned $700 in interest. Rather than withdrawing that money, let’s suppose that you choose to reinvest your $700 interest earnings in year 2. That said, you’d start year 2 with a $10,700 balance, and assuming the same interest rate, you would finish the year with $749 of earned interest. Assuming you continue to reinvest your interest, you’d be starting year 3 with $11,449 and so forth.
Earning $700 interest in a year may not seem like so much at first glance, but what about if you had more time to let your investment grow?
At this point, take a moment to make your best guess on how much $10,000 invested at a 7% rate would be worth after 20 years of compounding. What about after 30 years?
Would you be surprised to find out that if you left your initial investment of $10,000 and let compound interest work its magic for 20 years, that it would be worth $38,697? Now how would you feel knowing that your initial investment would be worth $76,123 after 30 years?
It’s important to note that these numbers were calculated without factoring in additional contributions over the years. Contributing an additional $100/month to your initial $10,000 investment, for example, would increase your balance to $87,891 in 20 years and $189,475 after 30 years!
Let’s look at one more example to drive the idea of compound interest home.
In this scenario, Mark lands a nice job right out of college and starts investing $300 into his retirement account at age 25. Meanwhile, his friend Julie decides to start investing $500 into her retirement account at the age of 35. Let’s see what happens, assuming they both want to retire at 62 years old.
*Figures calculated using this compound interest investment calculator
Over time, Mark contributes $133,200 to his investment account, while Julie contributes almost $30,000 more. However, Mark ends up with almost $130,000 more at retirement age. This is simply since he was able to take greater advantage of compound interest over the years.
When it comes to compound interest, time is your greatest asset.
As the famous Chinese proverb says, “The best time to plant a tree was 20 years ago. The second best time is now.” This couldn’t be more true when it comes to starting your journey towards financial prosperity. Your time truly is now.
If you would like to learn more about how you can take advantage of the 8th Wonder of the World, join our upcoming group coaching course. Sign up by Friday, April 2, for a special early bird price!
Read more from Jennifer!
Jennifer Gattinger, Executive Contributor Brainz Magazine Jenny is a personal financial coach with a passion for helping millennials reach their financial goals. Having completed a degree in Economics, along with Dave Ramsey’s Financial Coach Master Training, she teaches them how to organize their money and put it to work so that one day, sooner rather than later, they won’t have to. A millennial herself, Jenny’s financial savviness has allowed her to follow her dreams of travel and visit 50+ countries as well as compete internationally in two different sports, all while maintaining a sense of financial wellbeing.
