The Eighth Wonder of the World: Compound Interest
Updated: 5 days ago
The concept of compound interest is the backbone of creating wealth with your investments. The idea is that you buy assets that pay you, then take that earned money, and put it in more assets.
Eventually, you will notice a snowball effect since your money consistently works to buy you more assets. The best way to take advantage of the eighth wonder of the world is to start investing in assets as early as you can.
What is the Eighth Wonder of the World
Compounding interest is the 8th wonder of the world and is the key to building massive wealth on the stock market. Specifically, dividend growth stocks investments are the key since these assets ensure that your snowball will exponentially get bigger.
Dividends are a crucial part of compound interest because, without them, you rely on capital appreciation of your stocks alone. Of course, capital appreciation is fantastic, but dividend payments allow you to acquire more shares while also benefitting from capital appreciation.
The Time Value of Money
A famous finance saying states a dollar today is more valuable than a dollar tomorrow. This saying is based on the finance principle called the time value of money. If you receive cash today, the idea is that you can invest it and generate a profit with it.
On the other hand, a dollar that you receive in the future cannot be invested or used to take advantage of compounding. Therefore, it is always better to receive the money earlier than later.
The time value of money is relevant to dividend investors as well. Companies and ETFs that pay monthly dividends will compound your investment quicker than a quarterly dividend payer.
However, many of the best dividend stocks and ETFs pay quarterly, so you should not just invest in the stocks with the most frequent dividend payments.
Who Said Compounding is the 8th Wonder of the World
Albert Einstein is a well-known genius in the physics department, but many don’t know about his personal finance knowledge. Einstein’s famous quote is, “compound interest is the eighth wonder of the world. Those who understand it earn it; those who don’t pay it.”
You can choose to take advantage of compound interest or become a victim of it, depending on your financial choices. For example, buying a car with a loan is a great way to become a victim of compound interest.
You will have to pay for your car and the interest on top of it each month. On the other hand, the lender will collect your interest payments since they invested in your debt.
The apparent difference is that the lender uses their money to make more while you slowly drain your bank account each month by paying interest.
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The Power of Compound Interest
To demonstrate the true power of compound interest, consider this question. Would you rather receive a cash payment of $1m today or a magic penny that doubles daily for a month?
Most people would probably take the $1m cash and run. However, let’s do the math of doubling a penny each day for a month straight.
$.01, $.02, $.04, $.08, $.16, $.32, $.64, $1.28, $2.56, $5.12, $10.24, $20.48, $40.96, $81.92, $163.84, $327.68, $655.36, $1,310.72, $2,621.44, $5,242.88, $10,485.76, $20,971.52, $41,943.04, $83,886.08, $167,772.16, $335,544.32, $671,088.64, $1,342,177.28, $2,684,354.56, $5,368,709.12.
After 30 days of doubling a penny, you are left with over $5m! A key takeaway from this example is that most money is made after the 20th day. Therefore, starting your investment journey early is essential to taking advantage of compounding.
Utilize the Eighth Wonder of the World to Retire Early
If you want to retire early, understanding the stock market is vital. The first question you must ask yourself is how much money you need to cover your yearly expenses.
If you need $45,000 annually, you will need a $1,500,000 account that generates a dividend yield of 3%. However, if you factor in capital appreciation and assume a return of 10% annually, then you will only need $450,000.
These are significant numbers, but if you start early enough, the eighth wonder of the world will benefit you massively. Of course, you can also speed up the process by contributing as much money as possible from your income.
You do not need a high-paying job to retire early, but you must live below your means. Therefore, you should limit the amount of money you spend on liabilities such as cars and maximize your contributions to the stock market.
Compound Interest is The 8th Wonder of the World: Bottom Line
According to the genius Albert Einstein, compound interest is the eighth wonder of the world. Compound interest is when your interest payments make you more interest. It is quite literally the definition of putting your money to work.
To take advantage of the world's eighth wonder, you must start as early as possible. The most significant gains come about after many years of compounding.
Dividend growth stocks and ETFs are the best way to compound your money in the stock market. You will build wealth with capital appreciation, and the dividend payments will increase yearly.
Additionally, you can speed up the compounding process by consistently adding a portion of your income to your investments. The fastest way to build wealth is to limit your liabilities and maximize your investment contributions.
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