When you think of important things we should teach our kids, what do you think of?
Reading? Absolutely. Basic math? Of course.
What about understanding money?
What about compound interest?
That's a subject that doesn't often make the list.
Understand how compound interest works, and it can help you make money. But if you don't understand it, you could end up owing a lot more money.
And yet, it's a fundamental life skill with big impacts on one's future.
Believe it or not, the legendary Albert Einstein, had great insights into this very topic.
Let's dive into the magic of compound interest as viewed through the lens of Einstein.
Up Ahead:
- Albert Einstein
- Compound Interest
- The 8th Wonder of the World
- Einstein’s Compound Interest Quote Explained
- Is the Quote Real?
- Einstein and the Rule of 72
Albert Einstein
Albert Einstein, an iconic historic figure, is well-known across generations.
Even the little kids can recognize his bushy mustache and wild hair from pictures.
However, Einstein's legacy extends far beyond his recognizable look.
Einstein was a remarkable physicist and mathematician. His work on the theory of relativity revolutionized our understanding of time, space, and gravity.
But his brilliance wasn't limited to physics.
Einstein's talent for numbers and patterns might be why he had special insights into finance, especially compound interest.
On top of that, he had a knack for simplifying complex concepts, making them understandable for all.
His ideas on compound interest can provide us with valuable lessons on money matters.
Compound Interest
What exactly is compound interest? Let's break it down.
When you put money in a bank or invest it, over time, you earn some extra money.
This extra money is called 'interest'.
Now, what if this interest starts to earn its own extra money? That's where compound interest comes in.
Imagine it like this. You start with a small snowball and roll it down a hill. As it rolls, it picks up more snow and gets bigger. The bigger it gets, the more snow it picks up.
By the time it reaches the bottom, you have a huge snowball!
This is a lot like compound interest.
With compound interest, your money grows, bit by bit.
Then, that grown money grows even more. It's a cycle that keeps going.
Over time, this process can turn a small amount of money into a big amount.
The 8th Wonder of the World
You might have heard about the seven wonders of the world. These are amazing places that really wow people.
Did you know there could be an eighth wonder?
Albert Einstein thought so.
Seeing your money grow thanks to compound interest can be just as amazing as seeing the Great Wall of China or the Colosseum.
He said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."
That's a big deal, coming from a genius like Einstein!
Why such high praise?
He saw how powerful compound interest is.
Seeing your money grow thanks to compound interest can be just as amazing as seeing the Great Wall of China or the Colosseum.
Einstein knew this '8th wonder' was something we can all use to help us build wealth.
Einstein’s Compound Interest Quote Explained
Einstein reportedly said, "He who understands it, earns it; he who doesn't, pays it."
What does that mean?
This refers to the two sides of the compound interest coin.
Let's talk about 'earning it' first.
Say you put $100 in a savings account that gives you a 5% annual interest rate.
After one year, you earn $5 in interest. Now, you have $105 in the bank.
Next year, you earn 5% on $105, which is $5.25.
That extra 25 cents? That's compound interest!
"He who understands it, earns it; he who doesn't, pays it" refers to the two sides of the compound interest coin
Your money keeps growing, all on its own. That's how you 'earn it'.
Now, what about 'paying it'?
Suppose you borrow $1000 on a credit card with an 18% annual interest rate.
After a year, if you don't pay anything back, you'll owe $180 in interest, making your total debt $1180.
Next year, you owe 18% on $1180, which is $212.40 in interest.
That extra $32.4 is the compound interest that you owe on your interest from last year.
That's the 'paying it' part.
So, Einstein's quote is a simple way of saying: understand how compound interest works, and it can help you make money. But if you don't understand it, you could end up owing a lot more money.
Is the Quote Real?
Here's an interesting fact: there's no concrete evidence that Einstein actually said these exact words about compound interest.
The quote is widely attributed to him, but it may be more legend than history.
Even so, the truth behind the quote remains rock solid, making it worth considering, no matter who said it first.
Einstein and the Rule of 72
There's another financial concept often linked to Einstein - the rule of 72.
The rule of 72 is a quick, easy way to calculate how long it will take for an investment to double based on the interest rate.
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%. If you divide 72 by 6, you get 12. This means it'll take 12 years for your investment to double.
Now, let's take an interest rate of 10%. Divide 72 by 10, and you get 7.2. So, with a 10% interest rate, your money would double in about 7 years.
Simply divide 72 by the interest rate, and voila, you have the number of years it'll take to double your money
Some people think this rule came from Einstein.
After all, he's famous for making complicated things easy to understand.
It seems just like the kind of neat trick he'd come up with, right?
While it seems like the type of tool he'd devise, it's unlikely that he originated it.
The rule of 72 actually appears in a math book from the 15th century, centuries before he was born.
The rule is a valuable tool for understanding compound interest.
It simplifies the complex, making it more accessible to both children and adults.
