Compound Interest

Tenants who get evicted served as the inspiration for my next book. In most cases, they could have avoided the problem if they just had some rudimentary understanding of finances. One of the most compelling lessons has to do with the power of compound interest. In fact compound interest is so dynamic Albert Einstein is frequently "credited" with declaring it the Eight Wonder of the World (although there is no real evidence that he really said it.)

Regardless of Einsteins role, I love stories about compound interest. Here are some good ones that I share in my book, Stop Flushing Your Money Down The Drain.

1. If you put $100 per month into a savings account or investment for ten years, and if that investment always pays 7% interest, you can pull out $100 per month for all eternity. WOW and double WOW! If my parents had done that when I was a baby, we all would have had more money when we needed it.

2. If you can save $4 per day from places you are wasting money now, for 40 years (an adult’s working life) and if you earn 7% interest on that money, you will have $465,000 to begin your retirement. Some possible places to get that money? Change insurance, save interest by paying off credit cards, buy used cars, get a smaller home, downgrade TV package, stop buying fancy coffee, cheaper vacations. etc.

3. If Christopher Columbus was your great, great, great, great granddaddy and he placed one single penny in an account bearing 6% interest and you stumbled upon that account now, it would be worth an astounding 100 Billion dollars, or over sixteen-million dollars PER DAY. That would make you nearly as rich as Bill Gates and Warren Buffet, combined.

4. In the early 1600s, the American Indians sold Manhattan Island, in New York, for beads and trinkets worth about $24. Now, that real estate is among the most expensive anywhere in the world. That would suggest the American Indians got the worst end of the deal. However, if they had invested their $24 and received 8% compound interest, they would now have way over a QUADRILLION dollars. That is enough money to buy back the island and get all of the buildings free and clear, and still have billions of dollars left over. OMG!

Understanding and employing compound interest can make YOU rich. Some basic things you need to know are:

You have to start saving money and do it consistently. Don’t tell me that you need all the money you make now just to get by because that is a false argument. If your budget is stretched, it is not because you earn too little, but rather, it is because you spend too much. There are people getting by on 90% of what you make. All you have to do is live like they do and save the remaining 10%. According to David Bach, “the biggest mistake people make is never starting.”

The sooner the better - It is far better to begin saving now and do so for ten years than it is to wait for ten years and then save for 45 years after that. For a powerful illustration as to why you need to get going now, check out the chart from my friends at Safer Child. Even delaying one year can be costly. Check out the middle of the story at Grow Rich Slowly.

Compound interest also works against you and your debt. This can be crippling. In my book, and one of my earlier posts, I show readers why any money you waste has a FOREVER interest charge attached to it. That is because you could have paid off debt, but since you did not, interest expenses go on and on. Sorted.org has some good stories about compounding and the one called “Get Out of Debt Fast” is how compounding can work against you.

So the bottom line is Compound Interest is dynamic, whether it works for you or against you. It is most unfortunate that the tenants who get evicted never learned that lesson. Did you?

To visit my other blog about human interest stories