George Lucas continues to mislead millions of people into believing that the most powerful force in the universe is, well, “The Force”. But every successful household CEO knows for a fact that Lucas is dead wrong. That is not surprising at all given that Lucas is a filmmaker and not an astrophysicist. In fact, it was none other than Albert Einstein, the true authority on this topic, who unequivocally stated that, “there is no greater power in the universe than the power of compound interest.” And has there ever been a greater authority on the universe than Mr. Einstein?
Honestly, who could argue with Al on this? Yes, I know Al is dead, but let’s not quibble over technicalities.
Since Einstein is dead, allow me to use a simple example to prove Einstein’s claim. If you start with just a single penny and double it every day, how long will it take you to get to one million dollars? One year? Six months? Believe it or not, it would only take 28 days. To be specific, at the end of 28 days you end up with $1,342,177.20! Score one for Einstein!
The original penny turned into two, but then those two turned into four, and those four turned into eight, and so on. If you still don’t believe it, take a calculator and enter 0.01. Then multiply that number by two. Keep multiplying your new number by 2 and count how many times it takes to get to one million.
In a nutshell, the growth of your money sped up because not only was your original penny collecting interest — but ALL the pennies you received as interest also began to earn interest. This growth upon growth is known as “compounding,” and that’s where the term “compound interest” comes from.
If you learn nothing else from this blog, I want you to remember that there is not a force in the entire universe that is more powerful than compound growth. Please… Know it. Learn it. Live it.
Beware the Force, Luke
Like “The Force”, successful household CEOs understand that the power of compound interest can be used for good and evil. Compound interest is truly a double-edged light-sabre that cuts both ways. Just as it can help you when you save money, it can also just as easily bury you under an insurmountable amount of debt when you buy things on credit and fail to pay off the bill by the end of the month.
Although the millionaire-in-28-days example is good for illustrative purposes, I am now going a handy compound interest calculator to give a more common example of compound interest that occurs every day all across the world. If you invest $100 at 6% interest, at the end of one year you will end up with $106. At the end of two years, the uninitiated might expect you to have $112. But in fact, thanks to the power of compound interest, you would actually have a total of $112.36. That’s because you not only received interest on your original principal of $100, but also on the interest you gained from year one (the additional $6.00). Compounding in action! And again, beware the force, as this example also applies if that was a $100 debt rather than an investment.
True, the thirty-six cents extra interest thanks to compounding as shown in the previous example doesn’t seem like a lot to get excited about. The effects are hardly noticeable at first. But over time, compound interest becomes a force of monumental proportions. Like the mighty oak that starts out life as a lowly acorn, compound interest is something that must be nurtured over time. And the younger you are, the more opportunity you have to take advantage of the most powerful force in the universe when you are saving and investing.
Of course, and I know I am repeating myself, you also have to make sure that you avoid debt whenever possible so that compound interest, the most powerful force in the universe, does not put you in an early financial hole you may not be able to ever recover from.
Successful household CEOs understand the power of compound interest and use that knowledge as an incentive for saving and investing, and as an aid in helping them avoid unnecessary debt.