Do you want to make the best-informed financial decision all of the time? Duh. Of course you do. You’re not a dummy. But what if I told you that there was a way to always make the correct financial decision. It probably sounds like some scam, but it isn’t. It’s the power of compounding something that Albert Einstein referred to as “The eighth wonder of the world.”
The thing to remember about humans is that we are simple creatures. Sure, our bodies are wonders and our brains can be, too. But we’re always going to look for the simplest solution. We think in linear ways. We’re not the greatest with complicated formulas. We have to use calculators. We see things in their simplest forms. For example, if we’re taking a trip from New York to Wisconsin, we tend to think in terms of straight lines; we don’t consider all the twists and turns between here and there.
You’re probably thinking, great, we’re simple creatures, but what does that have to do with my money. Well, money growth doesn’t work in a linear fashion either; it can compound in a geometric way. Banks in the nineteenth century used simple interest calculations, but they very rapidly realized that compounding was a far better way to make money. I compare it to bacteria in a Petri dish. A bacterial colony starts out slowly; one cell becomes two, which become four, and so on. But at a certain point the doubling really takes off, and you’re talking about much larger numbers being created in the same span of time. Think of that bacteria as your money.
Let’s take these two people as another example. One uses the power of compounding and the other takes the “saving now versus later” concept. Compounding always rewards the person who saves sooner. Our compounder has an extra $5,500 coming in annually, and she starts to save it. After ten years, she stops saving and just lets it grow and compound. Meanwhile, the “save later” person also has that extra $5,500 coming in, but she finds ways to spend it. She goes along like that for ten years, then starts saving in the eleventh year.
By year forty-three, our Go-Getter (who put away $55,000 for those first ten years and then didn’t save anymore) has more money than the Slowpoke (who waited until year eleven and then saved for thirty-three years)—$181,500. The Go-Getter saved more than three times the amount of the Slowpoke but was still behind!
It’s a no-brainer. Use the wonder and power of compounding to benefit you. Don’t be the slow starter. You’re smarter than that…hopefully.
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