According to Albert Einstein, the most powerful force in the universe is compound interest. How can a great man of science speak so highly of a mathematical and economic concept? Surely, there must be a reason behind this claim and I’ll try my best to explain it here.
Right from the very beginning of our lives, exponential growth (my personal term for the concept of compound interest) is already working for us. Inside the womb of our mothers, we all started as a single fertilized cell. That cell splits into two within 24 hours and those two cells would again divide to become four. Through this continuous process, that single cell eventually grows into a human baby composed of billions of cells in just a span of 9 months.
That is just one example of how exponential growth affects our world. Of course there are many other theories whose foundation was built through the concept of geometric progression. This includes the creation of the atomic bomb which Albert Einstein once theorized to be possible through a massive nuclear chain reaction. Perhaps this was the reason why he claimed that compound interest is the most powerful force in the universe.
But now, we should concern ourselves on how we can apply this tool into our financial life. How can we accumulate wealth exponentially and become rich?
The first step to harnessing the power of exponential growth is to understand the three factors that affect it. These are the amount of input, the rate of growth and the number of cycles.
This is your starting investment. The higher your initial amount, the faster it will grow.
This is the rate at which your input grows. Likewise, the higher the rate, the better.
This is the number of times that the process of growth is applied. The more cycles you allow, the higher your earnings.
Once we understand how these three work together, then we can furthermore study how we can control them. And once we have learned this, then our paths will be set towards financial freedom. So the question now is, what can we do to harness the power of exponential growth?
- Consciously save money that you will use to invest– track your expenses and pay yourself first. (Input)
- Increase your financial literacy– learn how to invest and discover the right investment for you. (Rate)
- Be patient, let your money grow– make time your ally and learn how to delay gratification. (Cycle)
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Photo courtesy of Giuseppe D.
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