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Compound Interest- Eighth Wonder of the World or Nightmare Thumbnail

Compound Interest- Eighth Wonder of the World or Nightmare

Ben Franklin called compound interest the eighth wonder of the world. Compound interest as the phrase implies, is making interest on previously earned interest. Compound interest can create a significant amount of wealth over time. For instance, if you invest $100,000 today at a 6% rate of return or interest, the amount of money you will have in 30 years is $627,000.This is wonderful if you are the person receiving the interest but can very painful if you are the person paying the interest because you have borrowed money.

The Dutch paid $24 for the island of Manhattan 400 years ago. By some estimates, the island is now worth over $3 trillion. That is a compounded interest rate of 7% over the last 4 centuries. This is a powerful example of the positive power of compound interest for investors. The downside of compound interest is for those who are borrowing money at very high interest rates, especially those with credit card debt. A person with $15,000 of credit card debt charging 18% interest can create a very difficult financial situation because of compound interest. If the person with $15,000 of debt waits 5 years to start paying down the loan, their credit card balance will soar to $36,600 during that time. At $36,600 the annual interest alone will be $6,700 annually. 

You want to use the power of compound interest to create wealth as an life long investor and avoid taking high interest debt which will serve to destroy wealth and make you poorer.