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Albert Einstein may not have said
it, but it's the same anyway...
"Compound Interest is the most
powerful force in the universe."
Growing up naive, red-ass and
ignorant of wealth, I never understood compound interest and
the concept of compounding until I had borrowed enough money
to get that it is difficult to pay off the principle because
of the compounding of interest getting in the way.
I would say that compounding and
compound interest are in the domain of moral skepticism.
And a quick note: Shariah Financing
doesn't feature compounding in its model that I am aware of, a
huge difference in philosophy. [Someone could help me
out here, to clarify this.]
Of course, if you are a wealthy
person, compounding is your friend and your slave for sure!
I would say that at the root of
most everything today in the western world is the concept of
compounding and more specifically compound interest.
What is it?
It's easiest to use and remember by
a little cliché called the Rule of 72. Anyway, that's
how I remember it and use it.
It's simple, you take the effective
interest rate as a whole number, so 10% is '10' and divide it
into 72, to see how long it takes for the principle to double
if you leave it to compound with the interest.
So, if I have $1,000 at 10%
interest, and I plan to leave it alone, collecting the
interest and compounding it along with the principle, when can
I expect that $1,000 to double in size?
Simply: 72/10 = 7.2 years, which is
the time the $1,000 I placed in principle at an annual rate of
10% will become $2,000.
This doesn't seem like much, until
you ask yourself about this question?
How much will you have if you start
with a penny and double it every day for 30 days?
So day 1 = .02; day 2 = .04; day 3
= .08...and so on to 30 days.
Day 5: $.16
Day 6: $.32
Day 7: $.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12
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