Investing is the key to sustainable wealth.
Albert Einstein said it best. “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
The wonders of the world are physical materialistic things, so when Einstein gave credit to a concept as the eighth, it is compelling. Compound interest has been around for thousands of years. The Babylonians called it “interest on interest”. That’s exactly what it is and why Einstein’s quote is so important. You will earn interest on your original contribution plus on the interest your contribution earns.
It has been, said with an expected rate of return around 10 percent, money should double every 7 years. The below chart is a small example of how money can grow over a 20-year period with a $1,000 deposit and no other contributions added.
| Year | Initial Investment | Interest Rate (%) | Balance (after interest) | Free Money |
| 1 | $ 1,000 | 10 | $ 1,100 | $ 100 |
| 2 | $ 1,000 | 10 | $ 1210 | $ 210 |
| 3 | $ 1,000 | 10 | $ 1,331 | $ 331 |
| 4 | $ 1,000 | 10 | $ 1,465 | $ 465 |
| 5 | $ 1,000 | 10 | $ 1,611 | $ 611 |
| 6 | $ 1,000 | 10 | $ 1,772 | $ 772 |
| 7 | $ 1,000 | 10 | $ 1,949 | $ 949 |
| 8 | $ 1,000 | 10 | $ 2,144 | $ 1,144 |
| 9 | $ 1,000 | 10 | $ 2,358 | $ 1,358 |
| 10 | $ 1,000 | 10 | $ 2,594 | $ 1,594 |
| 11 | $ 1,000 | 10 | $ 2,854 | $ 1,854 |
| 12 | $ 1,000 | 10 | $ 3,139 | $ 2,139 |
| 13 | $ 1,000 | 10 | $ 3,453 | $ 2,453 |
| 14 | $ 1,000 | 10 | $ 3,798 | $ 2,798 |
| 15 | $ 1,000 | 10 | $ 4,178 | $ 3,178 |
| 16 | $ 1,000 | 10 | $ 4,595 | $ 3,595 |
| 17 | $ 1,000 | 10 | $ 5,055 | $ 4,055 |
| 18 | $ 1,000 | 10 | $ 5,560 | $ 4,560 |
| 19 | $ 1,000 | 10 | $ 6,116 | $ 5,116 |
| 20 | $ 1,000 | 10 | $ 6,728 | $ 5,728 |
The balance is now worth over 6.5 times the original investment. Around the 25th year, the interest you are earning (1,000) annually will be as much as your initial investment. That’s why compound interest is so amazing. It’s important to know that the secret to continued success with investing is time allocated. The longer you allow the time-box, the more the net potential growth will be.
The second part of Einstein’s quote is alluding to the difference between saving and borrowing. We can see that if we save, that we can gain huge returns. The opposite is true if we borrow. I’m not writing in this article to explain that credit card debt is bad. I’m simply stating that if somebody doesn’t understand debt and uses it wrong, then the interest is reversed to where they will owe larger sums than they originally borrowed. That’s why Einstein says, “…he who doesn’t, pays it”.
I titled this article “Money Does Grow on Trees”, because I wanted a catchy title. That goes against my normal style, but I wanted click bait, because this concept is too valuable to not understand.
With compound interest you basically receive free money by loaning your money out. Your money will grow without you touching it. Sure, there are various things to invest into and smarter picks than others that you can choose, but I’m not here to explain that.
I simply want you to understand compound interest and understand how you can use it to your advantage. As Americans, we spend more than we earn, we live paycheck to paycheck, and we have mountains of debt. That shouldn’t be the American Dream. We need to change our attitudes and realize we don’t need to have all these materialistic things now. We should learn how to save and build wealth.
