The 8th Wonder

You're either earning it or you're paying it - in all areas of your life

Jun 14, 2023

Good morning and Happy Flag Day (in the US)!

I got a lot of replies to last week’s “AI” email. Thanks for sharing your thoughts and feedback.

Among the emails I received, reader Scott shared this simple explanation of how AI works that he thought I would find interesting. And he was right!

I’d encourage you to check it out too.

And several of you indicated you would like to see a short video walkthrough of how to use some of these AI tools, so be on the lookout for that soon…

Today, I’d like to talk about the 8th wonder of the world.

Apparently, the seven wonders of the world are well documented, though there appears to be more than one take on what qualifies as a “wonder” and its respective time period.

And according to this Mental Floss article there are more than 10 different “8th wonders of the world.”

But for me, the 8th wonder is and will always be compound interest (#3 in the Mental Floss article linked above).

And apparently Albert Einstein agrees with me… He is credited as having said:

“Compound interest is the most powerful force in the universe.”

Einstein goes on to say about compound interest:

“Those who understand it, earn it, and those who don’t, pay it.”

For those who’d like a quick refresher on what compound interest is and how it works, check out this 6 minue video from Kahn Academy:

You might want to also check out the follow-up video to the one above on the “rule of 72” which is a helpful and easy-to-use shortcut that shows the power of compound interest. Here’s a link to that video.

And here are a couple more examples of compound interest courtesy of Jean Chatzky and HerMoney.

For you to experience the magic of compound interest on your money, you need 2 things:

Time
Patience

Which are 2 things that are most often in short supply when it comes to long-term investing. Especially when you mix in the sometimes violent ups and downs of the stock market.

But the sooner you get started and the longer you can be patient - most importantly during volatile markets, the more likely you too will see the rewards of compound interest.

For instance, Warren Buffett generated over 90% of his multi-billion dollar wealth after he turned 65. Of course, he started investing much, much earlier buying his first stock when he was 11 and his first real estate investment when he was 14.

I don’t think anyone would argue that Buffett is a gifted investment mind, but the biggest contributor to his success is compound interest over a long period of time with a lot of patience mixed in.

Want to see what compounding looks like over almost 70 years?

However, the power of compound interest extends beyond just our bank and investment accounts…

Compound interest also works - for better or worse - in other areas of our lives.

Whether it’s the food you consume or the thoughts running through your mind, these things often have a way of building - or compounding - on each other.

Our daily habits - even the ones that happen on autopilot - will compound over time.

Once again… for better or worse.

Your ideas compound.

Your relationships.

Your health.

For more on the broader implications of compound interest in our lives, I encourage you to read these 2 articles:

As I’ve written before, our lives - where we are today, this very moment - are a reflection of all the decisions we’ve made up to this point.

And the decisions we’re making right now.

This is true of our financial situation, our relationships, our health, our happiness, our… everything!

And your tomorrow - whether 2 weeks, 2 years, or 2 decades from now - will reflect the compounding of your decisions and choices along the way.

Are you being deliberate and purposeful in your decisions and choices - both big and small?

Are you taking full advantage of the 8th wonder of the world in your finances and your overall life?

Many days, I know I’m not.

But it’s something to aspire to and strive towards as we pursue our financial and lifestyle goals for ourselves and for those who are most important to us.

What do you think about compound interest, financial and otherwise?

Hit reply and let me know.

Results?

Saw this Churchill quote recently and it immediately brought to mind the deep pockets and big brains behind the Wall Street marketing machine. Many financial product manufacturers and the so-called financial advisors who promote and sell their wares will wax poetic about the complicated yet elegant strategies that went into developing their latest “must have” investment du jour. These are often categorized as “alternative investments” which I - as a rule - avoid. And based on my 30 years experience as an advisor, I’d encourage you to avoid them too.

“However beautiful the strategy, you should occasionally look at the results.”
—Winston Churchill

A good rule of thumb related to the above: if you can’t easily look up the current price of an investment on a website like Yahoo Finance, consider that a red flag. 🚩

More Debt

I recently wrote about “Managing Your Debt” and how not all our debt is financial. Well, leave it to Morgan Housel to skillfully introduce another form of debt in his May 25th article: