May 5 2022
Compound Interest: The greatest mathematical discovery of all time
Albert Einstein made the same observation when he stated that compound interest was “the eighth wonder of the world,” “the greatest mathematical discovery of all time,” or even “the most powerful force in the universe.” Whichever version you prefer, you can’t miss his message: never underestimate the power of compound Interest.
But what exactly is compound Interest?
Let’s say you make an investment that earns 20% per year on your $100. The first year, you make 20%, and you end up with $120, and the next year $144, and the next year $172.8. It keeps adding onto Itself. If you’re compounding at 30% per year for 30 years, you don’t just end up with ten or twenty times your money – you endup with thousands of times your money.
Let’s see the math behind it.
For determining how many times you will end up.
1.percent period = X times
If we take the previous example that earns 20% per year for 10 years.
1.20 10 = 6.19 times
Or If we take it further for a 20 year period.
1.20 20 = 38.33 times
As you can see in the graph below. At first it doesn't seem like a big deal. But overtime, It starts multiplying by itself and when it hits the threshold it will continue to grow exponentially.
The General formula of compound Interest.
A = P(1 + r/n) nt
A = Final Amount
P = Initial Principal Balance
r = interest rate (decimal)
n = number of times interest applied per time period
t = number of times period elapsed
Let’s put the previous example with the general formula.
A = 100(1 + 0.2/1) 1(20)
A = 3, 833.75
P is our initial investment which is $100. r is the interest rate: we get return per year in this case 20% (0.2 in decimal). n is the time period interest rate will be applied, every one year, and t is for how long we are going to compound (20 years).
Sure, the first method I explained is easier than the general formula.
Compound Interest applies just for investing? I don’t think so.
If reading is your daily habit, you’re becoming wiser than when you wake up. Everytime you’re adding new knowledge and connecting the dots to previous one. Let’s say that continues for 3-5 years. You will be far ahead than when you started out.
A YouTube channel is another way to look at a Compound Interest. When most people first start a YouTube channel, they have no video, no experience, and no subscribers. However, they make videos every week and improve their skills. One individual begins to watch and enjoys it. Another person might like to watch, and so on. This channel continues making videos with better experience than before, that leads them to more fans. I see this pattern more often in the youtube industrie.
Ask this type of question to get the idea.
Can I compound It over time?
Can I add a little thing every time?
How can I start small and have a big impact in the long term?