We're not talking about the Pyramids or the Great Barrier Reef. We're in finance land here, and in finance land, the 8th wonder of the world is Compound Interest. In fact, if you listen to Platinum Adviser Kane Jiang, Compound Interest is much bigger bigger than the pyramids or Stonehenge. Kane thinks it is actually the 8thWonder of the Universe! He illustrates the reasons behind his view here...
Does anyone know what is the ‘8th Wonder of the World’? It is a term coined by Albert Einstein, for this thing that is called “Compound Interest”.
As a financial planner, I think Albert didn’t give enough credit to Compound Interest, as I personally think it is the 8thWonder of the Universe!
Seriously.. I think Compound Interest is bigger than the pyramids and the Stonehenge! I will illustrate to you some points.
It was Compound Interest who gave birth to the term the ‘7-10’ rule. Anyone heard about it? The real estate agents love to talk about it. It is the mathematical miracle whereby if you earn 7% p.a. on your money, compounded, you will double your money in 10 years. Similarly, if you are lucky enough to be able to earn 10% p.a. compounding returns, you will double your money in 7 years!
And also, being a conservative financial adviser that I am, let’s not take a lot of risk here. Let’s assume a return of 7%/year in that 7-10 rule, rather than 10% return. The sharemarket in general has returned 8-9% per year in the last 100 years.
But how does this work for you? What does this mean to the average Australian??
So let’s say you are an average Australian. You would be earning the average Australian wage of $70k p.a. After paying your dues to the ATO, you would have about $50,000 of income per year. If you save 10%, or $5,000 this year, by doing nothing and letting your money invested somewhere earning 7% p.a. you would have $10k in 10 years’ time. And the magic does not end there. By 30 years, the original $5k would have grown to $40k. All this achieved, without you required to do anything at all.
If you put this into perspective in a building and construction sense, imagine you now have in your possession a 1 storey house in year 1, that magically becomes a 4 storey-house in 30 years’ time, by doing nothing!
So let us stretch our numbers a little bit, and add REGULAR savings into the equation. If you are able to religiously set aside $5k, not only in the first year, but every year, into the same investment, you would have:
- $80k in 10 years’ time,
- and if you fast forward 30 years, you would have $500k (yes, half a million dollars!).
- In the building & construction sense, by you adding an extra level/storey to your house every year for 30 years, it turns out that you did not end up with a 30 storey hotels..
- You end up with more than three – 30 storey hotels!
- In money terms, basically if you are a 30 year old average Australian, and if you include the money that your employer pays into your super, you will almost be guaranteed a millionaire by 60 years of age!
Going back to the savings issue, we were using example of you, the Average Australian, getting into the habit of saving 10% of your after-tax income. Imagine if you are able to start getting into the habit of saving 20%. I should have named this article “Who wants to be a millionaire” shouldn’t I?
The 8th Wonder of the World.
Let me re-phrase that again.
The 8th Wonder of the Universe!
You don’t have to take a lot of risk. Or do too much work, in order to become wealthy. All you need is consistency, regularity, and let the 8th Wonder of the Universe work your money for you.