The Eighth Wonder of the World

  • Einstein (maybe): 'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.'
  • The magic: You earn interest on your interest—money making money making money
  • Time > Amount: $100/month from age 25 beats $200/month from age 35 (same contributions!)

The Power of Starting Early

  • Age 25: $200/month at 7% for 40 years = $525,000
  • Age 35: $200/month at 7% for 30 years = $244,000 (half the money!)
  • Age 45: $200/month at 7% for 20 years = $104,000
  • Lesson: 10 years of delay costs you $281,000. Start now.

The Rule of 72

  • Divide 72 by your interest rate to find doubling time
  • At 6% → money doubles in 12 years (72 ÷ 6 = 12)
  • At 8% → money doubles in 9 years
  • At 12% → money doubles in 6 years
  • At 24% credit card debt → balance doubles in 3 years (scary!)

Compounding Frequency Matters

  • Annual: $10,000 at 10% = $11,000 after 1 year
  • Monthly: $10,000 at 10% = $11,047 after 1 year
  • Daily: $10,000 at 10% = $11,052 after 1 year
  • Continuous: $10,000 at 10% = $11,052 (theoretical max)
  • Over 30 years: Daily vs annual compounding adds ~$50,000 on $100,000 at 10%

Real-World Return Rates

  • S&P 500: ~10% historical average (7% after inflation)
  • Bonds: 3-5% typical (lower risk, lower reward)
  • Savings account: 0.5-5% (varies wildly by bank and era)
  • Real estate: 8-12% including appreciation and rent
  • Crypto: Who knows? Could be +500% or -90%

Famous Compound Interest Stories

  • Warren Buffett made 99% of his wealth after age 50—compounding takes time
  • Manhattan was 'bought' for $24 in 1626—at 7% that's $8 trillion today
  • Benjamin Franklin left $4,500 to Boston in 1790—it grew to $5 million by 1990
  • A penny doubled daily for 30 days = $5.4 million (2^30 pennies)
  • Ronald Read, a janitor, died with $8 million—just consistent investing for 50 years

The $1 Million Retirement Math

  • Starting at 25: Need to save $381/month at 7% to hit $1M by 65
  • Starting at 30: Need $548/month (44% more)
  • Starting at 35: Need $804/month (111% more)
  • Starting at 40: Need $1,214/month (219% more)
  • Starting at 45: Need $1,920/month (404% more!)

Inflation: The Silent Wealth Killer

  • Average inflation: 3% per year historically (2022-2023 was 7-9%)
  • Real return: Nominal return minus inflation (10% - 3% = 7% real)
  • $100 today: Worth $74 in 10 years at 3% inflation
  • Savings accounts: At 0.5% interest and 3% inflation, you're LOSING 2.5%/year

Compound Interest vs Simple Interest

  • Simple: Interest only on principal ($1,000 × 10% × 10 years = $1,000 interest)
  • Compound: Interest on principal + accumulated interest ($1,000 → $2,594 at 10% for 10 years)
  • The difference: $594 of 'free' money from compounding
  • Over 30 years at 10%: Simple = $4,000 total, Compound = $17,449 total
  • Banks use compound interest against you (loans) and simple interest for you (some savings)

Pro Tips for Investors

  • Automate contributions: Remove human temptation to skip months
  • Reinvest dividends: DRIP (Dividend Reinvestment Plan) supercharges compounding
  • Minimize fees: 1% annual fee costs $100,000+ over 30 years on $500k
  • Tax-advantaged accounts: 401(k), IRA grow tax-free (compound on the full amount)
  • Don't panic sell: Market dips are buying opportunities for long-term investors