W hat do Einstein and Warren Buffet have in common? Both of them swear by the powers of compound interest. Many of you are probably asking, “What is Compound Interest? Is it the Secret to Creating Wealth?”. Compound interest is incredible but can be useless if we don’t know what it is, why it’s essential, and how we can use it to start building wealth.

Although the idea of compound interest has been around for a long time, what it is can still be confusing. Compound interest is nothing new. It has been around for centuries, and some theorize it originated from ancient civilizations when they loaned cattle to compensate for the natural growth of the herd. Although this is just a theory, some evidence of compound interest seems to come from the ancient babyloneons when a clay tablet was found that appeared to be from about 2000–1700 B.C. It seemed to show a compound interest problem.

According to Investor.gov, Compound Interest is interest paid on principal and on the accumulated interest. To explain this, we will use the example of $100 growing by 10% annually with compounding interest. In the first year, your money would increase to $110. The following year instead of growing by another $10, you would increase it by $11 additional dollars, a total of $121 after two years of compound interest. That is because, after the first year, it increased to $110 then the second year, 10% of $110 is $11.

Understanding how compound interest works is helpful for a variety of reasons. After seeing how this works, it is imperative to recognize that this is a foundation for many financial products, including credit cards and different investment products.

All of this is great, but knowing how to apply this information to make some serious money is challenging. (Who am I kidding? That’s why you’re here, right?) This will not be a comprehensive list but a general overview of different financial products that can access this newfound power you wield! A few products that may be worth researching could be real estate, government bonds, and stocks, just to name a few.

In conclusion, compound interest has been around for decades, but understanding its intricacies, why it is crucial, and how you can use it to assist you in becoming as wealthy as some of the most notable investors on the planet, including Warren Buffet.

*Disclaimer this is not financial advice and is created for entertainment purposes only

1. Investor.gov
2. Lewin, C. (2019). The emergence of compound interest. British Actuarial Journal, 24, E34. doi:10.1017/S1357321719000254