Compound interest: the cure for financial markets fear

Compound interest: the cure for financial markets fear

Find out why Albert Einstein referred to compound interest as the eighth wonder.

Compound interest: the cure for financial markets fear

One of the many obstacles to investing savings is fear. One of the keys to overcome the fear of financial markets is hidden in the magic of compound interest. Once you discover it, you’ll be motivated to make your savings grow by creating an accumulation plan.

Let’s see why. First, we’ll have to answer to a simple test.

Imagine you are asked to do a 30-day job and you can choose between two different payments:

1. €1,000 per day for 30 days.
2. 1 cent € on the first day, 2 cents the next day, 0.04 € on the third day and so on. Basically they offer to double your salary every day for 30 days.

What would you choose?

If you opted for the first option, then you would have lost over ten million and seven hundred thousand euros (10.707.418,23, to be exact). And here’s the magic of exponential growth models. The second option would have allowed you to exceed the 30.000 (that’s how much you get with the first option) by the 22^nd day of work.

In investing, the compound interest comes into play when, in addition to investing part of our capital, we also reinvest the interest gained from the investment.

While in an investment with simple interest, gains originate exclusively from the initial capital, investments with compound interest allow you to profit from the combination of your initial capital with the interest accrued so far.

Imagine having 50 euros of capital and investing it with interest of 10% in 10 years. This means “cashing in” 5 euros for each year passed. When we reach 10 candles we will find ourselves with 50 euros more, compared to our initial 50 euros. In short, we have doubled the capital (100 euros).

If we reinvested those 5 euro gaind the first year, the second, and so on, after 10 years we will have 129 euro. Almost 30 euros more than what accrued with the simple interest.

To put it in other words, compound interest can turn small regular payments into large sums. And that is way Albert Einstein purposely referred to compound interest as the eighth wonder.

If you’re interest in discovering how to reach 1 million simply by setting aside 138,660 euro per month, then the book One Million for my Daughter is perfect for you.