Investing 101: The 8th Wonder of The World
Investing is not just about making money; it's about making your money work long term. One of the most powerful concepts in investing is compound interest. Compound interest occurs when the earnings on an investment, both capital gains and interest, earn interest as time goes on. The power of compound interest lies in its ability to turn small, consistent investments into significant wealth over time. By reinvesting returns and avoiding the temptation to withdraw them, investors can harness the magic of compounding, making it one of the most powerful tools for building long-term wealth.
Albert Einstein said "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it."
Let us dive deep into this concept by looking at someone who made this work: “The King of the Investment World”. You guessed it right, it's Mr. Warren Buffet. In his early days, he delivered newspapers to make cash. Later, at the age of 11, he made his first investment to buy a pinball machine that would be placed at local barbers’ shops, through which he built a pinball game machine business, which he later sold. Through this, Buffet was able to understand the concept of value investing (“buying assets at a lower price and selling them for a profit”).
After graduating college, Buffett worked briefly in his family’s brokerage business and then moved on to partnerships where he managed other people’s money, achieving impressive returns. These partnerships were the starting points of his investment career, leading to the creation of Berkshire Hathaway, his now-infamous holding company.
Since, Warren has made consistent investments which has made him a billionaire now. Below, is the graph of Warren Buffet’s net worth which grew over time, due to the power of compounding.
Starting at the age of 11, it took him almost 20 years to reach his first million dollars, but later it took him just 7 years to go from $1 Million to $10 Million, which further grew and made him a billionaire. Warren Buffet actually accumulated 99% of his current net worth after turning 50. That’s why it's important to start as early as possible and have patience about growing your money.
There’s a rule in investing that helps us calculate the time period it will take to double our capital amount. That rule is “The Rule of 72”:
Time period taken to double the capital (in years) = 72 / Rate of Return
Let’s say, the rate of return on the capital is annually 12%, then it will take 6 years to double the capital. But, here’s the magic part, if you initially invest $10,000; then in 6 years it will become; $20,000; later 6 more years and it becomes $40,000; six more years and it becomes $80,000. In 30 years, you will have $320,000.
In conclusion, start as early as you can, and calculate your time period that will be required to double your capital using the “The Rule of 72”.
