compound interest

Get Rich Investing Reality?

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Albert Einstein once said that the most powerful force in the universe was compound interest. What most people don’t understand is that, while powerful, compound interest needs a lot of time to work. Unfortunately, when most people start looking for financial planner, or stockbroker, or just researching how to invest on their own, they start with unrealistic expectations of how rich investing can make them. The most important thing to remember is that it takes money to make money, even in investing. If you aren’t starting with a million dollars, you won’t be making a million dollars any time soon. How Fast Can Investing Make Me Rich? When a lot of people start investing, they start with something like their 401k plan or other retirement plan. Usually, they contribute a small part of their paycheck each month. Over time, the money adds up nicely, but not to the extent that makes anyone excited. After saving up some money outside of a retirement account they start thinking about online trading, or investing in something that grows faster. Not to put too fine of a point on it, they want to get rich fast. Unfortunately, that isn’t really how investing works. If …

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Real Power of Compound Interest

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I have a full follow-up coming in response to some of the questions I received on a recent post about how to get rich fast investing in the stock market. In that post, I showed how it is nearly impossible to get rich investing in less than a decade or two, unless you start out with a sizable amount of money in the first place. The reason this is so shocking to people is that they hear all the time about the power of compound interest. While it is true that over the long-term, compound interest is very powerful, it takes a long time to get going. Imagine the trickle of a mountain stream building slowly over miles and miles until it becomes the Mississippi River, and you get some idea of what the real power of compound interest looks like. In the meantime, I stumbled across this instructive comic from xkcd.com about the power of compounding interest.

Power of Compound Interest – A Case Study

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compound interest

Over at MarketWatch recently, was an interesting article entitled Make Your Kid Rich for $1 a Day. I’ll let you go over there and read the particulars if you are interested. However, I think that the concept provides a great way to study the phenomenon of compound interest, and the elements that go into it. Compound Interest Only Works Over Long Periods People love to quote Albert Einstein saying that the most powerful force in the universe is compound interest. What most people forget is, that as a physicist, Mr. Einstein was used to working on a very large scale, with a very long timeframe. Let’s start at the beginning. Compound interest is not magical. It is merely the phenomenon of earning interest on your previously earned interest. So, if you invest $10,000 and earn 10 percent interest annually, then you would earn $1,000 in interest, and have $11,000 at the end of the year. (Sort of, depending on how interest is paid and compounded, but let’s not quibble.) The following year, you would also earn the same 10 percent interest. However, this time, you earn 10 percent on $11,000, not just the original $10,000. In other words, you are …

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