Written 7 March 2005.
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Senator Charles Grassley (R) was on C-SPAN this morning talking about Social Security reform among other things. He attributed the following quotation to Albert Einstein: "Compound interest is the only miracle in the world."
Did Einstein say that? I rather doubt it. It is too stupid a thing for Einstein to say. And there is no room in his worldview for miracles. There is nothing miraculous about compound interest, and there is no 'magic' in it either. It is very simple arithmetic. Suppose you invest $2000 at 10% compounded annually. At the end of the first year, you have $2,200. How much do you have at the end of the second year, assuming no additions or subtractions from the principal? $2,400? No. What you have is $2,200 + 220 = $2, 420. Where did the extra twenty bucks come from? That is interest on interest. It is the interest on interest on interest . . . that make compounding a powerful tool of wealth enhancement.
But there is nothing miraculous or magical about it. Words mean things. Use them wisely.
And don't look to Einstein for advice on personal finance.
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