Compounding
“The most powerful force is the universe is compound interest.” - Albert Einstein
One of my favourite definitions of wealth is the transfer of money from the impatient to the patient. Compound interest is the ultimate super weapon of the patient.
Consider this: if you had invested $1 at the time of Jesus birth, at the rate of 3% per year compounding, your investment would today be worth more than every asset on earth including real estate, precious metals, commodities, diamonds and cash.
In fact here is the actual amount of money you would have after 2,000 years:
$45,878,814,326,049,600,000,000,000
For comparison this is one trillion dollars:
$1,000,000,000,000
Of course no-one has a 2,000 year investment time horizon, but how about 45 years?
Warren Buffett has averaged a 20.3% return since he purchased Berkshire Hathaway in 1965.
So what if a relative of yours had invested $100,000 with Warren Buffett in 1965? Today it would be worth $492 million.
$492,000,000
Of course it is only with hindsight that we can pick the best investor the world has ever known, but the principle is the key.
Let’s look at a more reasonable example. If a relative of yours had invested $100,000 in the S&P500 (broad US stock market index) in 1950, today (adjusted for inflation) you would have $6,200,000.
So practically what does all of this mean?
As I said in the “Pay Yourself First” chapter, start right now to take the first 10%, 20% or more of your earnings and invest that amount in an asset class that has a history of making a return significantly above inflation. If you want to help yourself in the future start putting money aside. If you want to help your children or your grandchildren, start a fund for them.
If you receive a windfall from the sale of a business, or a rental property, or an inheritance, put aside a large portion of that as a compounding investment.
This is a sure way to grow your wealth.