The Eighth Wonder of the World
According to legend, Albert Einstein said there was an eighth wonder of the world. This particular bit of nature has the ability, like nothing else in the universe, to combat entropy, that secret magic of the Angel of Death, sprinkled out amidst our atoms like salt in a wound. Matter tends to decay over time, as energy, nature’s Robin Hood, moves from a place of more to a place of less. Flowers wither. People tend to grow older with each passing day. Hot tea and bath water alike eventually become cold. Oreos turn stale and mushy.
In keeping with this trend, money tends to be spent. That is, unless it isn’t. Money, unlike all these other aspects of our reality, has the power within it to enlarge with time — because of time.
What Einstein (or his apocryphal kin) referred to was compound interest. Compound interest is the mechanism of money to pile up and widen out, rather than wither up and fade away. As the strands of our double helix build on one another to replicate DNA, money can build upon itself, producing ever more of its own progeny, a kind of fecund economic sui generis. Money is a sort of supernatural rabbit. It’s rabbits all the way down, in fact.
This Is How You Swim in Gold
Remember Uncle Scrooge’s Money Bin from DuckTales? Imagine that it started with a single gold coin. One day, that coin split like a cell during mitosis, creating two gold coins. Those two split to create four. Four became eight. Eight became sixteen. And so on, working in powers of two until the bin is full enough for Scrooge to take his famous dive into a pool of solid gold doubloons.
To activate the magical property called compound interest, all one has to do is invest. Over time, the cash will fold over and climb ever higher, as the value of the dollars invested grow. In savings accounts and bonds, it accrues because an institution (like a bank or government entity) loans it out to others and collects interest on the payments. With stocks, it happens as the perceived value of a company (like Amazon or Ford) increases through the years. If your money is invested in one of these sources, it grows along with all the rest.
If you train yourself to set aside money from every single paycheck, you will get wherever you want to go.
This all takes time, of course, so the earlier you start and the more often you do it, the better. All said and done, this is how you, too, can swim in gold. If you’re more of the step-by-step type, though, here it is, in plain language that anyone can understand.
Step 1: To get started, take a few dollars and put them into a savings account or investment fund. (Such as my choice: Wealthfront. They have high-yield cash savings, traditional investment portfolios, and multiple retirement accounts.)
Step 2: Do this over and over at regular, preferably frequent, intervals.
Step 3: Wait.
Step 4: Keep waiting.
Step 5: Repeat steps 2–4 until reaching desired results.
That’s it. There is nothing more to compound interest and becoming the wealthy person of your wildest dreams. Sure, it will take more than a few dollars to become financially independent, but if you train yourself to set aside money from every single paycheck, you will get wherever you want to go.
Great (Realistic) Expectations
Warren Buffett once said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” The first two of these were more or less beyond his control and ultimately matter little when it comes to investing. The third, compound interest, is in some sense available to all.
Once you begin to think like this, saving 50% or more of each paycheck begins to make a lot of sense.
So, the first practical step to following in Buffett’s footsteps is to figure out how much you want/need to have for your goals or in retirement (nowadays often called Financial Independence instead, because of the early retirement ages for some people, those fortunate souls) or both. Then, run those numbers through a compound interest calculator. Assuming three or four decades for your financial independence horizon and something like 6 — 7% compound interest (accounting for inflation), you can actually determine how many dollars to set aside each month to get there.
Certainly, some people get there much sooner than others. Stories abound of thirty-something individuals quitting their job and “retiring”. Assuming they did not receive outside help from a trust or other windfall, early retirees mostly get to financial independence so young because they save so much.
A podcast called “The Mad FIentist” interviewed one such individual. He said he considers every purchase he makes as a withdrawal from his retirement fund. It might sound extreme (like those crazy coupon people on TLC). But once you begin to think like this, saving 50% or more of each paycheck begins to make a lot of sense.
Make Compound Interest Work for You
Think, right now, about all the wonderful dreams you have for your life (#YOLO). See the world? Get married? Buy a house? Have children? Send them to college? Drive a vintage car? Collect art? Start your own business? Be a full time artist? Donate to charities? Volunteer?
With enough time, self-discipline, and patience, anything is possible for you.
Nota bene: I didn’t say it would be easy or that anyone could do it. You will have to make a living of course, spend wisely, save substantially, and have both the years ahead and inner fortitude to wait it out.
That may not sound like a whole lot of fun, but I can darn near guarantee that your kids’ education, that trip to Europe, and retiring with your family taken care of will feel pretty wonderful. In other words, every penny saved will a) be worth far more than a penny and b) have been more than worth it in the end.
Will this money provide more joy in the present or the future?
Consider it a challenge. Make it a game. See just how much you can save. There will almost certainly be times in your life you will want or need a big chunk of change (whether it’s after a car wreck or a down payment for a new one). If you’ve saved up, then you’ll have it. Future You can thank Present You for all those dollars and cents you put in for them. Which is to say, for you.
Benjamin Franklin said that a penny saved is a penny earned, but we know now he was only partially correct. A penny saved and invested is worth far more than a penny earned — or spent for that matter. Keep that in mind as you go about your day.
Ask yourself one question before each purchase: Will this money provide more joy in the present or the future?
Do a quick calculation of how much it would be worth after 5, 10, or 20 years of compound interest, as the Oracle of Omaha himself did in his younger years. You may just find that it makes all the difference.
This article contains a personal invitation link for Wealthfront, an investment brokerage.
