“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” - Albert Einstein
I know what you're thinking - super exciting cover photo right? Nothing like a calculator to get you excited about reading an article. But really, it's the most valuable piece of technology in making you wealthy. Consider this famous story of the peasant who built a pyramid for a king:
The King asks what the peasant wants for payment. The peasant makes two offers to the King:
Option 1: "Pay me 10,000 loaves of bread."
Option 2: "Pay me one loaf of bread the first day, two loaves the second day, 4 loaves of bread the 3rd day and continue to double the amount of bread you pay me everyday for the rest of the month."
The King quickly choices the 2nd option believing he is saving 1000's of bread. "Stupid peasant. He could have had 10,000 loaves of bread!"
The King's treasurer comes to him on the 15th day and asks the King, "Why are we paying this peasant so much bread for the pyramid he built?"
"What? We're only paying 1 bread a day doubling every day. That can't be more than a few hundred breads. We got a spectacular deal on that pyramid" declares the King proudly.
Treasurer: "No, no, no, you fool! The kingdom will be bankrupt by the end of the month. We had to pay 16384 breads just today!"
The King then does the math and figures he owes the peasant 536,870,912 breads on day 30.
And in real life, the King gets pissed that he has been outsmarted and sends his army to go kill the peasant so he does not have to pay his debt.
That's the extreme power of compound interest. Let's take a more practical example; saving your money.
What's 100,000 VND to you today? A couple drinks with friends? A dinner out?
What's it worth to you in the future? Depends what you do with it. If you invest that 100,0000 VND at 8% annual interest:
10 years: 215,000
25 years: 685,000
40 years: 2,172,452! - that is 21 times your money!
Next time you are spending or earning money - imagine it multiplied by 21. You'll negotiate for a better salary and a better price on what you're buying.
"Thank you" - from your future self.
- Austin Carter
Edu2Review - The No.1 Education Review Website
