This week we’re traveling around the world for our favorite catchy sayings series. You’ve probably heard of the 7 wonders of the world – places like the Taj Mahal, the Roman Colosseum, the Great Wall of China. But do you know about the 8th wonder? According to Nobel Prize winning physicist and mathematician Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Profound wisdom! Not sure what that means? Let us explain.
When you have savings and/or investments the money you put in is called “principal.” When interest is paid on the principal, that interest is then added to the principal (your original amount) and that new total earns even more interest next period (interest on interest). Then interest is paid on that new amount and repeated. In other words, the interest you earn then earns its own interest next month, and on and on. Einstein’s quote shows how it is a double edged sword: “he who understands it, earns it; he who doesn’t pays it”. So, you can either be on the receiving end of compound interest or the paying end. How does that work exactly? Read our article here for the full story.