Compound Interest

This article is inspired by a confluence of events, some of which happened.

First, I don’t think Einstein ever said this quote that follows. However, someone said he did, and I derived inspiration from it nevertheless:

The most powerful force in the universe is compound interest.

—Albert Einstein (only not really)

He did actually say something similar. Here’s why. Let’s say you find an investment opportunity that earns 7.2% per year, compounded annually. And let’s say you invest $100. Then, if you don’t deposit or withdraw money from your account, its value will look like this over time:

After n yearsAccount balance
0$100.00
1$107.18
2$114.87
3$123.11
4$131.95
5$141.42
6$151.57
7$162.45
8$174.11
9$186.61
10$200.00
20$400.00
30$800.00
40$1,600.00
Account balance after earning
7.2% interest, compounded annually

Whoa, look at it go! What this shows is that if you can stash some money away at 7.2% compound interest, your money will double after ten years. And it’ll continue to double—the whole thing!—every ten years after that, too, if you’ll leave it alone. Your returns will be even better if you can put in a little extra cash every once in a while.

Compound interest is a powerful force, and so it makes sense that Einstein would mention it.

The other events in my personal confluence were a couple of friendly endorsements from people I’ve worked with at various points in my career. Some nice people said that I had been a good guy to work with (or for) and that I might be a fit for a nice project that’s coming up.

Now this feedback wasn’t a shock, but it was a pleasant surprise and a reminder of how important it is to leave a good impression. I think it’s a normal part of my nature—dominantly the result of my parents’ training—to treat people in such a manner that could cause this kind of thing to happen from time to time. I don’t always get it right, but I try.

I’ve seen other people make a different decision. Once I watched a man figuratively slam the door in someone’s face during an attempted conversation. I asked him later, OMG, what if that person were your boss someday? He took the question itself as an insult. He most indignantly informed me that that b___ would never be his boss; what in the hell was I thinking?! But, you know what? It happens. That b___ is a procurement agent now. That b___ is a project manager now. That b___ is the VP of a startup you’re dying to join. That b___ has your future in her hands.

Now, this is one of those topics that, if you didn’t agree with me already, I’m not going to be able to change your mind here. But I promise it’s true: the behaviors you exhibit in your earlier years compound in people’s minds, and they bring their rewards (or punishments), magnified, in your later years.

Some ideas I hope you’ll consider:

  • Save money when you can, and earn compound interest. When you can, be the payee, not the payor. The younger you can begin doing this, the more the benefits will compound.
  • Invest in your own personal reputation. Be kind, honest, respectful, professional, decent, helpful, and loyal. The younger you can begin doing this, the more the benefits will compound.
  • If you are an influencer of children (parent, teacher, coach, relative, …), teach them about compound interest, both literally (how to do the math) and figuratively (how to choose good behaviors).
  • And remember, your behaviors reflect on people you associate with, as well—your boss, your teammates, your business partners, your spouse(s), your siblings, your children, your grandchildren, …even people who aren’t born yet! For example, if you act like an ass, people are probably going to assume your kids are asses too, even if they’ve never met them. It’s probably not what you want.

There are so many reasons to be a decent person. Some are philosophical. Many are practical.

P.S.: Investing in your physical fitness is another realm in which your returns are compounded over time. So, take care of yourself. The sooner the better.


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One response to “Compound Interest”

  1. Jack Applewhite (former Oracle DBA, now retired) Avatar
    Jack Applewhite (former Oracle DBA, now retired)

    Yes, money, “karma”, and health “investments” will all benefit (or fail) depending on time and effort. I’d add that, WRT money, one should also consider the cost of any investment method. Fees and taxes can greatly diminish returns. Over the 40 yr. span you use, one or more low-cost index funds have great performance. We have several at Vanguard that have done quite well. Only in the last few years (I’m 73) have I discovered the closest thing I’ve seen to a “free lunch” – given that my wife and I are fairly philanthropic – is a Traditional IRA. You put money in tax-free, it grows tax-free, and you can make QCDs (Qualified Charitable Distributions) to 501(c)(3) organizations tax-free. For decades we let our IRA portfolios grow and now are able to donate about $100k / yr. tax-free. It’s a dream-come-true for us.
    Having been quite active for many, many years, we are enjoying the compound rewards of, not just exercise but constant motion, as we age. Delighting in a “Mediterranean” type diet is also a key component to good health.
    Echoing and adding to an old saying, we affirm that the requirements for a good life are:
    – Eat right
    – Keep moving
    – Sleep well
    – Have dogs

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