“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it“
Albert Einstein
Yes, it really seems that Albert Einstein was struck by the properties of compound interest.
Probably he was referring to the laws of physics; nevertheless we are interested in investments and so the meaning of compound interest can be easily understood thinking to the interest associated with an investment: the underlying amount of money increases exponentially—rather than linearly—over time.
What does it mean? It is very simple to show it with an example.
Let’s imagine that you are a college student in your 20s.
Then you may be interested to calculate the final value of a 10.000$ investment with a 10% return along the next 40 years.
By the time you are 60 how much will your investment be worth? The answer is easily provided by math: the initial amount has to be multiplicated by (1+10%)^40.
You can therefore easily calculate that the 10.000$ have become around 452.000$: that’s the power of compounding! The money has increased by a 45x factor.
If you are able to reach a higher percentage return, much better. Much much better.
If you can have your investment grow at 15% yearly instead of 10%, after 40 years you will see an increase of your money of about 268x times. Yes, the numbers are correct: if you allow 10.000$ to compound for 40 years at 15% then your investment will be worth 2.678.635$.
Now tell me: isn’t it worth investing well for your old age?
Wise Value Investing 