Harnessing the Power of Compound Interest

Harnessing the Power of Compound Interest

Albert Einstein ? once said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

So what is compound interest and how can WE be the ones to earn it❓

Compound interest is the interest paid out on your principal investment AND on any interest already earned. Simply put, it is interest paid on your interest. ? To understand just how powerful this effect is, consider the below table. This shows how much an investor who saves $10,000 every year and receives a 7% APY will make over 30 years.

In the first 10 years, they invest $100,000 and receive a comfortable $38,000 in interest. ? By year 20 they have invested $200,000 however have earned $210,000 in interest – they have doubled their initial investment ?. By year 30 they have invested $300,000 however earned $644,000 in interest, over tripling their initial investment. ?

What’s more, this example assumes a 7% APY. By using ? our passive income guide you can start earning more than 10% APY on your stablecoins.

Compounding can also be applied to other areas of your life. When we learn about a topic we construct a mental framework. ? When we continually add knowledge to this framework, not only do we benefit from the knowledge itself, but our ability to gain knowledge also increases.

Now we understand the principals, let’s talk about how you can use the power of compounding to build wealth ?:

1. Start saving as soon as possible.? In the above example only $38,000 of interest was earned in the first 10 years vs $435,000 in the last 10 years. It all comes down to time in the market.
2. Capital preservation is king. ? The true cost of losing a dollar is actually far higher than a dollar because you have lost the ability to earn compound interest.
3. Commit to continuous improvement and be patient. ⌚ Over time, these improvements, in any area of your life, will compound beyond what you thought possible.
4. Do not hold too much cash. ? Cash does not earn any interest and as such cannot grow exponentially. If you’re not sure how much is too much, or too little, check out our emergency fund guide. 
5. Pay off your debt, starting with the highest interest rates. Just as savings increase exponentially, so does debt. The higher the interest rate, the more extreme this effect will be.

Apply these tips to your everyday life, harness the eighth wonder of the world and it will be you who earns it, not who pays it.