Christopher Columbus and Compound Interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.” (Albert Einstein)
In 1492 Christopher Columbus decided to save for retirement. He had just one penny to invest and felt he could get 6% interest on his meager investment. He put the penny in his left pocket and each year transferred the interest ($0.01 x 6% = $0.0006) to his right pocket, never adding anything to the original penny in his left pocket.
526 years later, Chris is ready to retire. Added together both pockets total a walloping 32 cents (526 years x $0.0006 is $0.315). Not exactly the smartest planning.
Now let’s assume Chris understood the power of compound interest. Instead of putting the interest in his right pocket, he kept it all in his left pocket (along with the original penny) to compound with interest. How much would Chris have now?
At the end of 526 years, compounding at 6% interest, Chris would have accumulated $204,590,342,444.88. (That's 204 billion, 590 million, 342 thousand, 444 dollars and 88 cents.)
Now, none of us will live to see 526 years, but the concept still applies to all of us. As Albert Einstein said, "Compound interest is the most powerful force in the universe."