Understanding compound interest
A
lbert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it – earns it – and he who doesn’t – pays it.” Compound interest is, in my opinion, the most fascinating concept in finance. The ability to earn dollars on dollars and not have to do much other than be patient is terrific. Warren Buffett likes to quote Mae West a lot in that “Too much of a good thing can be wonderful.” I believe compound interest falls into Mae West’s quote. Let’s begin with a simple math exercise. If I asked you what a penny doubled for 31 days would be at the end, what would you guess? Don’t look any
In a Nutshell
Compound interest demonstrated with the value of a penny that doubles every day for a month.
42 Lake Martin Living
MONEY MATTERS
further before guessing. Most people guess far too low. The answer is $10,737,418.24, which is hard to fathom. The point to take from this exercise is that most of this wealth wasn’t created until the last few days. In the beginning, a penny goes to two on day two and to 4 cents on day three, and by day 15, it’s only $163.84. The eighth wonder that Einstein references does not happen until the end. Lee Williams Charlie Munger, Buffett’s partner in Berkshire, said it another way, “The big money is not in the buying and selling but in the waiting.” Lee Williams offers products and services using the following business names: Nowlin & Associates - insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC securities and investments | Ameritas Advisory Services (AAS) - investment advisory services. AIC and AAS are not affiliated with Nowlin & Associates.
