The Undeniable Power of Compound Interest
Albert Einstein once might have said, “compound interest is the most powerful force in the universe.” Despite the questionable veracity of the quote, the underlying message is definitely accurate. Compound interest allows your money to grow exponentially rather than sitting under your mattress or in a coffee can. Let’s look at a couple of examples:
- $1000 placed in a coffee can (0% interest) in 1980 would be worth exactly $1000 today.
- $1000 placed in a 1% interest bank account in 1980 would be worth $1,308 today.
- $1000 invested in an S&P 500 index in 1980 would be worth $21180 today.
Go ahead and mess around with the calculators on the following two websites:
Compound interest calculator -
S&P 500 returns calculator –
As you can see, compound interest will make your money grow faster and faster as time goes by. In fact, even with a large salary and a very high savings rate, eventually compound interest will overtake your income and the returns on your investments will surpass the amount of money you can save each month. Once you hit this crossover point, you are financially independent.
The hard part about compound interest is that you have to let it compound. You can’t skim the interest off the top and use it to pay for a vacation or a new car. You can’t take a chunk of that savings and use it to pay off the credit card you overspent on last month. If you take money out of your accounts as they grow, you are no longer achieving compound interest, you are achieving simple interest.
Allowing your savings and investments to grow over a long period of time while periodically adding to them is the single most important factor in achieving financial independence and giving yourself the freedom to retire early. Use compound interest as a tool to achieve your goals.