“Compound interest is the eighth wonder of the world”
“The greatest invention of mankind is compound interest.”
Albert Einstein is attributed to have said some version of all of these quotes. Whether he did or did not actually say this remains to be determined, but the truth is that compound interest really is a force to be reckoned with.
Compound interest can cause your retirement fund to grow way more than what you could’ve contributed yourself, and you can end up living on what you never could have saved up in your wildest dreams. $5000 invested at the age of 18 in a Roth IRA and left alone can turn into half a million dollars by the age of 72 with an average 9% interest rate.
$5,000 + compound interest magic + time= $500,000 for you
Compound interest can also get you in tons of credit card debt- the kind of debt that you couldn’t imagine wracking up in your wildest dreams. $5000 of credit card debt at a 22% interest rate would become $44,235 in 10 years.
$5000 + compound interest + time (not much) = $44,235 owed to your bank.
Now that you’re in your thirties, make sure you’re aware of this miraculous compounding power. You can make compound interest work for you, or you can let it wreak havoc on your financial life, but either way, you have to start now because compound interest compounds fast, and waits for no one.
If you learn one financial lesson in your thirties, let it be this one- use compound interest wisely and start now.
Here’s a chart of $5000 invested in an IRA at age 18, untouched until age 72, at various interest rates. If somehow you averaged a 13% interest rate, that $5000, without ever adding another penny, would become over 3.5 million dollars when you retire. Now that’s some powerful magic.