Compound Interest – Is it the Greatest Invention Ever?
The topic of “compound interest” has intrigued man all throughout history. It is believed that Albert Einstein was once quoted in stating that compound interest was not only man’s greatest invention ever, but that it is the “…most powerful force in the universe”. According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” In the year 1790, Benjamin Franklin left both Philadelphia and Boston a total of $5,000.00 each. The cities were directed to create a special fund for the money that would expand over the course of two centuries. If the needy needed to borrow from the money, it was acceptable as long as it was repaid at 5% interest. Once the first century passed, the cities could withdraw up to $500,000 from the fund. The remaining money had to remain in the funds for another 100 years. Benjamin Franklin wanted to educate people on compound interest, which is why he did this. In this guide, you will learn how compound interest works and several other facts pertaining to compound interest. If you want to learn how to make your money make you more money, continue reading.
How Compound Interest Works
Compound interest is relatively simple to understand. In the most basic terms, it is interest that is earning interest. Let’s say that you saved $100.00 within the past year. In that time, you have probably earned about $2.00 in interest. If that money remains in the bank for another year, you will earn interest on the total amount, which is $102.00. Overall, the money is not much, but, it is a productive example that will help you understanding the concept of how compound interest works. It is the original amount that you have saved, plus, the interest earned. Then, the interest earned on that total amount. Over a long period of time, a couple of dollars have the potential to transform into a large amount of money.
Now that you understand how compound interest works, it is important to learn about the benefits offered to you. They are as follows:
- Regardless of who you are, the amount that you save, or your financial knowledge, you have the ability to earn compound interest on any type of investment.
- If you are saving money, compound interest is highly beneficial. You should avoid borrowing money, though, as compound interest may then wreak havoc on your financial health.
- If you allow your money to compound for a long period of time, it will – eventually – grow at a much faster rate.
- Compound interest will work for you, regardless of the amount of money that you invest.
If you understand how compound interest works, it is easy to conclude that – as long as it is working FOR you – it is, in fact, one of the greatest inventions. However, if it is working AGAINST you, it will result in financial devastation. When working to save money, you should always strive to place the money into a type of investment that will allow your original investment to grow. Once your investment starts to compound, you are sure to be thrilled at the amount of money that you are able to acquire through compound interest. While it may take a few sacrifices today, compound interest will result in numerous financial rewards tomorrow!