The Eighth Wonder Of The World
By Jon Flynn
The Great
Pyramid Of Giza is simply just an amazing construction. It’s the perfect
example of what thoughtful planning, persistent hard work, and stubborn
patience can come together to achieve.
Adding just one stone block at a time, it took the ancient Egyptians
over twenty years to construct. While it
may not come as a surprise that the Great Pyramid is known as one of the
“seven wonders of the world”, it probably does that Albert Einstein once called
“compounding interest” the 8th wonder of the world!
Why was
Einstein so enthralled with this basic financial formula? Let’s take a look….
In its
simplest terms the compound interest formula works not only to provide you with
“interest on your principal”, it also creates “interest on your interest”. For example, on a deposit of $1000 and a 6%
rate you’d receive a payment of $60 after a year. Now lets say you decided to leave your original
investment of $1000 along with your earnings of $60 in to grow for another
year. In this case rather than earning
$60 like you did in the first year you’ll earn $3.60 more or a total of $63.60
in the second year. You ended up earning
more because you earned “interest on your interest”. Pretty simple, right? Most of us do understand how this basic
formula works, but few of us really grasp how much of an impact this basic
formula can have on our financial future.
How much of an
impact? Well, let’s look at the
following hypothetical example involving a twenty-five year old working person
we will call Dave.
Dave’s plan is
to work until he’s age sixty-seven at which point he can receive full social
security benefits. He feels that he can afford to put away the first $1.50 he
makes per hour or just $12 dollars per eight-hour day. This works out to around $240 per month. He’s done some research and has found that
the stock market over the long term has produced average yearly returns in the
range of 8%-12%. He hopes to earn at
least the low-end of the market’s historical range and achieve long-term
returns of around 8% per year.
Summarizing, Dave intends to place $240/month into an investment vehicle
projected to grow at 8% per year for 42 years.
Using the
friendly compound interest calculator found at www.moneychip.com the result comes out to
almost 1 million dollars! How? The magic
of compounding interest or as Einstein called it “the eighth wonder of the
world”. Please keep in mind that the
rate of return is for illustrative purposes only. Higher rates of return come
with higher rates of risk. Also past
performance does not guarantee future results.
We should all
encourage our children and grandchildren to start saving early. If they take the same approach that the
pyramid builders did of thoughtful planning, persistent hard work, and stubborn
patience they can also produce an amazing result.
Everybody
situation is different and arriving at solutions can get complicated. So always consult with financial, legal, and
tax professionals before making any decisions.
Jon Flynn
is a Certified Financial Planner TM and owner of Flynn Financial in
Eynon. He is a Representative of Securities America, Inc., Member FINRA/SIPC
and of Securities America Advisors, Inc. Flynn Financial and Securities America
are unaffiliated. Mr. Flynn can be
reached at 570-876-5015.