Compound Interest Is The Eighth Wonder Of The World: Good Investment Advice From Someone Who Knows
When considering how to maximise your investments it is always sensible to take advice from someone who knows what they’re talking about. And there can be few people better qualified to give you advice on multiplying your money than Albert Einstein.
Here’s what Einstein, most famous for his mass-energy equivalence formula E = mc²
– also known as the world’s most famous equation, is reported to have said about compound interest:
“Compound interest is the eighth wonder of the world.
He who understands it, earns it … he who doesn’t … pays it.”
“Compound interest is the greatest invention of mankind.”
So let’s look at what compounding is and consider a couple of examples which show how it can help to grow your wealth.
One of the most interesting things about compounding is that it doesn’t call for any special knowledge, techniques or skills. It doesn’t rely on timing the market, or other risky strategies, to grow your money.
Compounding may appear complicated on the face of it but essentially it is very simple: It is a situation where reinvesting your returns on an asset in turn generates more returns, and returns on the returns and so on, to grow your money exponentially. It relies on the passing of time to grow your money.
Now consider these two examples:
* Someone aged 25 putting aside £375 a month and making an average 6% annual investment growth would have contributed £180,000 and would have a pot worth £750,543.07 by age 65.
* Someone aged 40 putting aside £600 a month and making an average 6% annual investment growth would also have contributed £180,000 but would have a pot worth £417,875.36 by age 65.*
That’s still a pension pot worth having of course. But the investor who started earlier has, despite contributing exactly the same amount of money, a final pension pot worth well on the way to double the money.
When it comes to compound interest, therefore, two things are clear: Firstly, by harnessing the power of compounding quite modest sums of money can be turned into very sizable sums of money given the passage of time. Secondly, the sooner you start harnessing the power of compound interest the more powerful the returns can be – someone who saves or invests smaller monthly amounts for longer can be far better off thanks to compounding.
If you would like more advice on taking advantage of the power of compounding, or indeed on other investment strategies that can help grow your wealth, please contact us.
* Calculations made using The Calculator Site at https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php