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Why Albert Einstein loved compound interest

compound interest albert einstein

Almost everyone focuses more on the rate of return than on the length of time for which their capital will be invested. “Buy right and hold tight” is a slogan adopted by some of the world’s most successful investors. If an amount of $10,000 is deposited into a savings account at an annual interest rate of 3%, compounded monthly, the value of the investment after 10 years can be calculated as follows… In the two examples above, it was assumed that interest compounds annually. Compounding means how often the interest is added onto the principal amount.

  • Note that you
    should multiply your result by 100 to get a percentage figure (%).
  • I’d like to know if it was made up or if Einstein ever said anything close to this.
  • Simply divide 72 by the interest rate, and voila, you have the number of years it’ll take to double your money.
  • For example, let’s say you have an interest rate of 6%.

Start by multiply your initial balance by one plus the annual interest rate (expressed as a decimal) divided by the number of compounds per year. Next, raise the result to the power of the number of compounds per year multiplied by the number of years. Subtract the initial balance
from the result if you want to see only the interest earned. Let’s take a look at how we put these into our formula…

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Or maybe you’ve heard the story of a little girl asking her grandmother to pay her an allowance of one penny that doubled every day for a month — the little girl is a millionaire by Day 30. What these numbers show is the power of compound interest, or what theoretical physicist Albert Einstein reportedly called the most powerful force in the universe. When you buy stocks in a brokerage account and they gain value over time, you’re not getting compound interest. Rather, you’re getting the option to take advantage of compounded returns, since stocks don’t pay interest like bonds and savings accounts do. But all told, compounding could really work to your benefit, especially if you give yourself a long investment window. Making regular, additional deposits to your account has the potential to grow your balance much faster thanks to the power of compounding.

I’d like to know if it was made up or if Einstein ever said anything close to this. Let’s use the example of $1,000 at 0.4% daily for 365 days. From abacus to iPhones, learn how calculators developed over time. This article about the compound interest formula has expanded and evolved based upon your requests for adapted formulae and
examples. So, I appreciate it’s now quite long and detailed.

Why does the Rule of 72 work?

I lived on a ranch in California, and I was hard put to find the ladder whereby to climb. I early inquired the rate of interest on invested money, and worried my child’s brain into an understanding of the virtues and excellencies of that remarkable invention of man, compound interest. If Columbus had of placed one single dollar out how do businesses use retained earnings and how can accountants help at 6% interest compounded annually with instructions to pay the proceeds to you today, you would have over Ten Billion Dollars coming to you. Compound interest is the eighth wonder of the world for investors, but as you can see, it needs to reach a critical mass before people can truly harness it in a normal human life span.

compound interest albert einstein

Before an avalanche can smash trees and break legs, it needed to become a snowball first, and a piece of snow before that. Compounding interest doesn’t care about your race, gender, or age. Compounding interest affects everyone the same, because it depends on time. Imagine that instead of $100, you saved $10,000 and earned 10% for 30 years.

Albert Einstein and Compound Interest

By multiplying all the percentages together we get the final compounded value, then, by taking the applicable root of this value we distribute this appropriately over the periods ‘equally’. You might, instead, consider that the ‘average’ exam paper is the one that has the score that most people achieve. (The ‘average’ response to a question could be interpreted as the answer that the most people people think).

  • Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
  • QI hypothesizes that an anonymous advertising copywriter initiated the idea that compound interest was the world’s greatest invention or man’s greatest invention.
  • A simple way to think of this is that are are “as many answers higher than this as there are lower than this”.
  • I created the calculator below to show you the formula and resulting accrued investment/loan value (A) for the figures that you enter.
  • Let’s use the example above and assume you earn 10% for 10 straight years.

A recent Huffington Post story ran about a woman celebrating her 98th year as a customer of a local bank. June Greg’s father deposited $6.11 into her account 98 years ago, when she was only two years old. My colleague Conrad deAenlle also wrote about this money in the bank. FYI – Robbins’ exact line was “Compound interest is such a powerful tool that Albert Einstein once called it the most important invention in all of human history.” Over the years, I’ve read Einstein quoted as saying that ‘compound interest was one of man’s greatest inventions’, or other variations on this theme. In Tony Robbins recent tome (600 pages to write what would fit in a short magazine article) he offered this Einstein line.

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This isn’t the world I want my daughter to grow up in. It’s the habits that you live with which define your wealth. If your spending habits cause you to fight against interest, you’re going to fight that fight the rest of your life. Nobody makes a real fortune overnight, and nobody goes broke in one night either.

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