By Scott Glasgow - What is the great wonder and how does it work?
Albert Einstein famously said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." But what is this great wonder and how does it work? Here's Compounding 101!
Compound interest is interest that is paid on the initial principal balance plus the accumulated interest from prior periods. You earn interest on your interest!
The magic of compounding is little short of a miracle. Please don't underestimate it. As an example, let's assume you invest $5000 with a return of 7 percent per year.
Compounded at that rate over a decade, each $5000 initially invested grows to $10,000; over two decades, to $20,000; over three decades, to $40,000; over four decades, to $80,000; over five decades, to $160,000; over six decades, to $360,000; over seven decades, to $720,000; over 8 decades, $1,280,000!
Capitalism creates wealth, a positive-sum game for its owners. Investing in equities for the long term has been a winner's game. Overall, trust Einstein. Whether with savings, investments, or knowledge, let it compound!
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