When you think of the most powerful forces in the world, the first things that come to mind are gravity, the strong nuclear force and black holes but according to Albert Einstein the most powerful force in the universe is actually compound interest.
Not only this but he labels compound interest as that eighth wonder of the world.
Of course, we all know saving and investing is good but how powerful really is Compound Interest?
The Power of Compound Interest
Well starting off, many gurus will tell you that a penny saved is just a penny saved and so you should focus on making more money rather than saving more.
Their is some truth to this as it would obviously be better to make more and save more compared to making less and saving less but you'd be surprised at how powerful a simple penny can be when invested. In fact if you started with a simple penny and doubled it every single day for just one month or a measly 30 days you would end with a cool 10.7 million dollars if you started with one dollar you would actually be a billionaire by the end.
Of course doubling your money every day for 30 days is nearly impossible but this illustrates how quickly one can become wealthy with compound growth, and that's why it's exponentially more important to grow your money rather than earn more.
The Importance of ROI
Let's take a look at two guys with a different investment philosophies. Jeff is super concentrated on putting in as much as he can into investments as he thinks the more he put in the better. Elon on the other hand is more focused on the growth rate an isn't as concerned about the contribution.
Elon contributes a solid $10,000 per year but Jeff means business and doubles Elon's contribution putting in $20,000 per year, to do this Jeff puts an overtime at his job and works really hard to get a bonus at the end of the year.
Conversely instead of trying to contribute more money by working harder, Elon spends his extra time trying to grow his money faster. Elon isn't able to double Jeff's growth rate of 7% but he is able to increase it by 50% with a growth rate of 10.5%. Now, this doesn't seem like a big deal as it's only 3.5% higher per year, however after 40 years or basically a lifetime of work Jeff would have contributed $800,000 and have a total of $3.999 million or right about $4 million. Elon would have only contributed half as much as Jeff at $400,000 but he would actually have over a million dollars more than Jeff at $5.072 million.
The Importance of Time
Something even more interesting is that Elon could have just contributed $10,000 per year for the first 20 years and then completely stopped contributing altogether. Yet he would still have over $400,000 more than Jeff at $4.466 million so even more important that the growth rate is the investment time period.
Despite contributing the exact same amount for 40 years trade and maintaining the same growth rate Elon's contributions over the first 20 years are worth 4.466 million while his contributions over the second 20 years are only worth $600,000 or about 7.5 times less.
This is just an example but it's exactly what happens in
real life.
Amazon Compound Growth
We all know Jeff Bezos is the richest person in the world he currently has 185.1 billion dollars and that's after seeding 4% of Amazon to his ex-wife.
This means that if you didn't get divorced he would be worth $214 billion today but this isn't because he gets paid hundreds and millions in stock every year, like many other top Ceo's. In fact he gets no stock compensation and he had the same salary since he started Amazon at $81,804 per year.
Jeff Bezos is 56 years old and according to synchrony Bank the average American in their 50s has savings worth 6-7 times their annual. Even calling it 10x this would mean that the average American making Jeff salary would have had about $800,000 of the same age.
Given that Jeff has actually created $214 billion in total value for him and his family. this means that his investment is worth 26750000% or 26.75 million percent higher than the average American.
Considering that Amazon has only been around for 26 years you may be thinking that this means that it was going on average tens of thousands of percent per year, but in reality since going public in 1998 Amazon hasn't even had a single year of four digit growth in fact most of their growth percentages are in the double digits and out of the 22 years shown in this chart for seven years or about a third of the time they were actually shrinking.
Amazon's average yearly returns since 1998 is not even in the triple digits, it's actually only 78%. Now that's an astonishing early return but you wouldn't expect a double-digit return to take a man from a few hundred thousand to 200 billion in less than three decades.
Warren Buffett Compound Growth
You don't actually need to get nearly as high returns to become unbelievably wealthy in fact Warren Buffett who has averaged
20.5% returns or about double what an average dedicate investor could get has managed a mass $98.2 billion, yet a dedicated investor averaging 10.25% percent per year doesn't get anywhere close to 35 billion dollars.
Compound Growth vs. Speed of Light
Clearly I think we've established the immense power of compound interest over time but this blogpost isn't just about why compound interest is so powerful on our puny planet but why it's the most powerful force in the entire universe.
Let's compare it with some of the other incomprehensible forces of the world starting with light. The speed of light is a mind-boggling 670 million miles per hour but in our vast universe the closest planetary system to us Alpha Centauri would take 4.367 light years to get to or 25 trillion miles of travel instead if you just started at 10 miles per hour and increase your speed by just 10% per day so 11 miles per hour the second day and then 12.1 miles per hour the third day and so on and so forth in the same 4.36 seven light years you would have traveled on that number or 99 unvigintillion miles or 9.9755806131 x 10^67 miles.
COVID 19 Compound Growth
Just looking at the Covid-19 pandemic would tell you everything you need to know about compound growth. Though the date of the first case is heavily debated, it's currently officially thought to be November 17 to 2019 and in just the last 504 days it has grown from one case to over 130 million just plugging in a couple of data points into an exponential regression calculator we concede that the average daily growth rate is only 3.78%.
At first glance it wouldn't seem like an issue but it clearly is. At the same rate it would infect the entire world within the next 120 days and that's just based on the known cases.
Of course, their are a variety of reasons why this wouldn't happen and the growth rate would slow down but this once again shows the unlimited power of compound growth whether they're good or bad now this isn't to say you should go pour your life savings into Amazon stock tomorrow but you should be well aware of the power of compound growth and even if you don't take advantage of compound growth it is vital that you avoid compound growth working against you.
That's another post by Zeven done for you. Hope you liked it, if you did feel free to drop a like and comment your thoughts below. You can follow us on Instagram by clicking here, don't forget to join the mailing list for regular updates, That's it.