The Power of Compounding Interest

"Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t pays it.”
-Albert Einstein

Albert Einstein as well as many other brilliant and successful people understand how incredible compounding interest is. It is one important factor that separates the rich from the poor. Compounding interest is a relatively simple concept, yet few understand it, and even fewer utilize it.

Compounding makes a sum grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns over time. It causes your wealth to snowball over time, and grow exponentially. By compounding your returns, small amounts invested now, can yield incredible returns in the long run.

For example, take someone with the median income in the United States today: $50,000 a year. Now the average 25 year old making $50,000 a year would only need to save and invest 20% of their income per year to have a staggering $3,262,292 by age 60! And that is only assuming an average annual rate of return of 10%!

In total, the person in the example would invest a total of $350,000 over 35 years, but because of the power of compounding it amounts to over $3 million! This is a very realistic and achievable path, but it is important to note that fortunes are not made overnight, it takes time. Be patient, focus on your long term goals, and start taking the necessary steps to achieve those goals.

With a little bit of patience and discipline, your wealth can grow exponentially because of compounding interest. I encourage you all to take this knowledge, start investing now, and start having your money work for you. With the power of compounding interest on your side, you can achieve all your financial goals!

Note: You can see the power of compounding interest for yourself by spending some time playing around with a calculator like this one: http://www.moneychimp.com/calculator/compound_interest_calculator.htm