Compound Interest: The Eighth Wonder Of The World

What would you rather have: a million dollars today or a penny that doubles in value for 30 days?

At first glance, it seems like an easy choice: take the million dollars today. After all, a 1-cent penny isn’t even worth the 2.1 cents it costs to make the coin. But if you pick the million-dollar payout, you’d be leaving millions on the table. Don’t believe us? Let’s break it down:

Source: Created by the Paradigm Team.

The Real-World Magic: Compound Interest

While there’s no magic penny that doubles for 30 consecutive days in the real world, we do have a powerful ally: compound interest.

What is Compound Interest?

Compound interest occurs when the growth from your investment is reinvested back into the same investment repeatedly. This effect, often called the “miracle of compounding,” plays a huge role in your investment’s lifetime return.

Let’s look at this miracle in action, using a $10,000 investment compounded at 10% for 30 years:

Source: Created by the Paradigm Team

Pretty cool, right? You can see the miracle of compounding at work:

• After just 7.5 years, your $10,000 investment doubles in value
• By the 30th year, your $10,000 investment grows to a whopping $158,630!

The Double-Edged Sword

While compounding can be our best friend, we must be careful not to let it become our fiercest enemy. This is where debt enters the equation.

Imagine that $10,000 as a credit card balance with 10% interest charged. It’s a perfect example of how compounding can steadily multiply debt to an unmanageable point.

As Einstein wisely said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

Harnessing the Power of Compound Interest

One of the best ways to ensure compound interest stays your friend is by investing for the long term. This approach allows you to:

1. Drown out short-term market noise
2. Avoid the pitfalls of “market timing”

The Dangers of Market Timing

Market timing involves actively trying to buy low and sell high. While seemingly clever, it rarely works out in real life. In fact, investors who try market timing often miss some of the very best days to be invested.

To drive home this point, a 2021 Bank of America study on the S&P 500’s returns from 1930 to 2021 found:

• Excluding the ten best trading days each decade resulted in a mere 28% total return
• Staying invested through all ups and downs yielded a total return of 17,715%

Remember: It’s about time in the market, not timing the market.

Your Compound Interest Ally

At Paradigm, we make it our job and responsibility to ensure you stay on the right side of compound interest. Let us help you and your family earn and benefit from what Einstein dubbed the “eighth wonder of the world.”