Benjamin Franklin, one of the Founding Fathers of the United States, was a man of many talents. He was a writer, inventor, diplomat, and scientist. But did you know that he was also a proponent of compound interest?
What is Compound Interest?
Compound interest is the interest earned on both the principal amount and the interest that has accumulated over time. This means that the interest earned in one period is added to the principal amount, and the next period's interest is calculated on the new, higher balance.
For example, if you invest $100 with a 5% annual interest rate, you would earn $5 in interest in the first year. With compound interest, that $5 would be added to the principal, making your balance $105. In the second year, you would earn 5% interest on $105, or $5.25. Over time, this can lead to significant growth in your investment.
Ben Franklin's Views on Compound Interest
Benjamin Franklin was a strong advocate for compound interest. He famously said, "Money makes money. And the money that money makes, makes money." In his book, "Advice to a Young Tradesman," he wrote about the benefits of saving and investing early in life, and the power of compound interest to grow wealth over time.
Franklin also understood the importance of time in the compound interest equation. The longer your money is invested, the more time it has to grow. He advised young people to start saving and investing early in life, so that they could take advantage of the power of compound interest.
The Rule of 72
The rule of 72 is a quick and easy way to estimate how long it will take for your investment to double in value, based on the annual interest rate. To use the rule of 72, simply divide 72 by the interest rate. The result is the number of years it will take for your investment to double.
For example, if you have an investment with a 6% annual interest rate, it will take approximately 12 years (72 ÷ 6) for your investment to double in value.
The Power of Compound Interest
The power of compound interest can be truly remarkable. Over time, even small investments can grow into substantial sums. For example, if you invest $100 per month for 30 years with an annual interest rate of 8%, your investment will grow to over $150,000.
Compound interest can also be used to pay off debt more quickly. By making extra payments towards your principal balance, you can reduce the amount of interest you pay over time.
Conclusion
Benjamin Franklin was a wise man who understood the power of compound interest. By saving and investing early in life, and taking advantage of the rule of 72, you can grow your wealth over time and achieve your financial goals.