The power of compound interest
Albert Einstein was one of the most influential scientists of the 20th century and gained huge fame following his ground-breaking work and research into relativity.
He was awarded a Nobel Prize in Physics in 1921. To this day, his work remains important to the world of physics and his views remain relevant in an ever-changing world.
One of Einstein’s famous quotes (which is allegedly stated) is: “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
But what does this actually mean?
Compound interest is the ‘interest that grows on the interest’, and over time it has a snowball effect. The higher the rate of interest and the longer the time period, the greater the impact of compounding.
People benefit from compound interest with long-term savings or investments such as pensions, and pay for compound interest on debts such as loans and credit cards that charge interest.
Compound interest is the eighth wonder of the world.
If we had £10,000 today and an annual interest rate (growth) of 6%, the overall value would benefit from this compounding effect. How long would it take to double to £20,000? The answer is 12 years; in 19 years it would triple to £30,000, so you can certainly see the snowball effect and the power of compounding!
So when you review your finances, be aware of the power of compound interest. It certainly pays to understand it. If you have time, look up the Rice and Chessboard story!
- To read this feature in full and access further Lancashire business news, advice and analysis subscribe to Lancashire Business View magazine or join the LBV Hub from just £2.50 per month. Click here to subscribe now.