Originated in Italy during the 17th-century, compounding interest is also known as “interest on interest,” which will make any amount of money grow at a faster rate than simple interest, which is calculated only on the principal amount.
Let’s look at it from another perspective, if I gave you 1 EGP on the 1st of January and doubled the number every day, by the 31st of January how much money would I have given you ? 1,000 EGP? 10,000 EGP? No, you’d have received 1.07B EGP by compounding 1 EGP at 100% every day for a month. Congratulations, you’re a billionaire.
Here’s what the greatest men ever lived told us about the 8th wonder of the world.
- Albert Einstein called it “the most powerful force in the universe.”
- The greatest investor of all time Warren Buffett also said: “My wealth has come from a combination of living in America, some lucky genes, and compounding interest.”
- Benjamin Franklin described it as, “Money makes money. And the money that money makes, makes money.”
Now here are our reasons why Compounding Interest is the 8th Wonder of the World
1- Compounding interest will teach you that time truly beats money.
Compounding interest doesn’t care about your race, gender, or age. Compounding interest affects everyone exactly the same because it depends on time. That is why the earlier that you start investing, the longer your investment has to grow. It sounds cliche, but time truly does beat money. One lump sum investment today can make your retirement nest egg worth millions.
2- Compounding interest utilizes momentum.
Think of your money and investments as a snowball, piece by piece gathering momentum, until one day it is an unstoppable force, your wealth naturally attracts more wealth.
3- Compounding interest teaches you patience.
Just like fishing, it takes time to build wealth, there are no gimmicks or shortcuts. An investor whose main concern is compounding interest will instead look for a company that is growing slowly and surely because a wise conservative investment decision will beat out any high-flying trendy stock on any given day.
4- Compounding interest makes you money while you’re asleep.
As long as an investment is paying you interest or achieving steady returns, you can keep sleeping at night, because you know that time is your best friend. The longer time goes, the richer you get! As time goes on you will keep collecting interest or recording profits. As time goes on, you can reinvest that interest and get more interest.
5- Compounding interest is not only for the rich if that’s your excuse.
The rich don’t have any differential advantage in the market than the poor do. Your 1,000 EGP in the market has just as much of a chance at making a 10% return as anyone else’s 10 million EGP. However, only time will tell if you are smart enough today to put some money to work.
6- Compounding interest teaches discipline.
If you think that discipline is correlated to compounding interest, you’re mistaken. Did you hear every advisor and investor saying “Invest the same amount every month?”. That’s where discipline comes from. Doing the same action every single month even if the market is taking a dip you’ll still do it anyway. This strategy is effective and it also prevents you from making irrational mistakes in the stock market.
7- Be like Warren Buffett
By looking at Buffett’s portfolios, you’ll notice he usually invests in stocks that pay dividends which is another form of compounding. When dividends are reinvested, they will generate more dividends, and the game continues.
Whether you’re saving for a short-term goal or investing for the long haul, compound interest is your best friend. Let it work for you.