Friday, March 21, 2014

The Power of Compound Interest

It has been said that the most powerful force in the universe is compound interest, and that idea, in large part, is what originally drove me to start up a savings account. I decided to try calculating, at the astonishing annual percentage yield of 0.01%, how much green my $500 will generate over time.

Assuming that my bank stays open for the next million years, my wealth will indeed reach a mind-boggling size: if the all the dough my account accumulated was represented by the oceans of the earth, Bill Gates would have to be a billion times richer than he currently is for his net worth to represent a single drop of water. Compound interest, eh?

On the other hand, it might be preferable to tap into these savings sometime within this millennium, or, dare I dream, within my lifetime. If I leave my mazuma to multiply for fifty years, I might not top Bill Gates, but could I at least have a decent retirement fund?

It turns out that $500 at 0.01% interest would, after fifty years, yield a profit of two greenbacks and fifty-one pennies. Not enough dinero for a dinner, but that's the way of things. As powerful as compound interest is, I'd have to invest twenty million greenbacks in my current account if I wanted to generate enough wampum to live off of. When it comes down to it, time is much more powerful than Benjamins when it comes to making pelf with compound interest.

If you want your descendants to live like kings, consider depositing some big ones in an extraordinarily long-term savings account. Future generations will thank you for the lettuce, but consider that the oldest bank still in operation has only been around for five and a half centuries. In the end, it seems that compound interest is a lot like astronomy-- pretty cool if you have several billion years to watch things unfold, but not really important if you just want to pay the rent.

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