CAREER & MONEY
THE POWER OF
COMPOUND INTEREST
As Chief Market Strategist, Managing Director, and
Senior Transportation Analyst for Avondale Partners,
Donald is a frequent guest on CNBC and Fox. He has
been recognized as a top stock picker by The W
all
Street Journal, Fortune, Zacks and StarMine.
By DONALD BROUGHTON
turns $10,000 into $452,593 over a 40-year-period. Doubling the
interest rate earned results in a more than six-fold increase in total
return as the power of interest compounding on interest takes over.
But that is child’s play. Let’s double the interest rate again. This time
from 10 percent to 20 percent. If $10,000 is invested at a 20 percent
rate of interest with no additional money invested, it becomes…
$14,697,716! Doubling the interest rate to 20 percent results in a
more than 32-fold increase over 10 percent, and a 208-fold increase
over 5 percent.
Compound interest is the
eighth wonder of the world.
He who understands it, earns it.
He who doesn’t, pays it.
- Albert Einstein
Think about this the next time you consider not paying off your
credit cards in full every month, most of which charge an interest
rate of about 20 percent. If you carry a balance, you are living out
Einstein’s warning and making the credit card company rich while
guaranteeing your own poverty.
Why should you pay off your credit cards? Why should you spend
an extra couple of hours this week learning a new skill? Exercising?
Working? Insisting your investments generate a slightly larger rate
of return?
Everyone has heard about it. Everyone from Madonna to Albert
Einstein has commented on it, but unfortunately so very few
understand how powerful a force it is, or how broadly it applies to
our lives. What is it? Compound interest.
70
What does the flip side look like? Warren Buffet’s company,
Berkshire Hathaway, has produced an annualized compound annual
growth rate of just under 20 percent since 1967. Net result, Mr.
Buffet, despite not coming from inherited wealth, is the third richest
man in the world, has often been ranked as the richest, and is worth
more than $70 billion.
In her song, Material Girl, Madonna crooned, “…some boys romance,
some boys slow dance, that’s all right with me. If they can’t raise
my interest then I have to let them be.” She understood compound
interest, but what she might not have understood that Einstein did is
that compound interest is a force of nature. The eighth wonder of the
world applies to everything.
If I invest 10 percent more time working at becoming a better writer,
investor, bicyclist, gardener, lover, salesman, carpenter, or even
basket weaver, over a lifetime, I’ll become a six-fold better writer,
investor, bicyclist, gardener, lover, salesman, carpenter, or basket
weaver than I would have been otherwise. If I invest 20 percent
more time working at… then I become the Buffet, Shakespeare,
Arm