The Dangers Of Compound Interest

Or, make sure you're careful what you're compounding

It’ widely believed, but I’ve never seen it officially confirmed, that Albert Einstein once said

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.

And if you’re not familiar with the concept, compound interest is essentially earning interest on your interest. Or growth on your growth.

It works best when applied over long stretches of time. (Think decades, not just years)

For instance, in the image above Michael, Jennifer, & Sam had very different experiences with compound interest.

To read the specifics, check out this article from the Money Under 30 website.

And if you’d like plug in your own figures and see the impact of compound interest over time, you can play around with this compound interest calculator from NerdWallet.

I hope you’ll agree that compound interest is a powerful ally in your retirement planning and wealth building efforts, but only if you leave your money alone long enough for compound interest to do its thing.

But compound interest works for things other than just saving and investing your money.

Philosopher and priest Franz Brentano on how small errors compound:

What is at first small is often extremely large in the end. And so it happens that whoever deviates only a little from truth in the beginning is led farther and farther afield in the sequel, and to errors which are a thousand times as large.

In simple terms, be careful what you let compound.

Especially over long periods of time.

Things said in anger. Or things not said.

Feelings of shame or guilt.

In my experience, these things tend to fester and only get worse the longer they’re left unaddressed.

And life’s too short, isn’t it?

My friend Carl recently shared the same thought on Twitter:

So if you have a friend, family member, co-worker, or someone else that you need to make peace with, do it sooner than later.

Because compounding.

And lest you think non-financial compounding is all bad, here’s an additional perspective I recently shared on Twitter:

As you might imagine, the application of compound interest to your health, sleep, and more can be positive or negative.

The responsibility is yours.

By the way, since I’m sure you can hardly wait to hear from me in each weekly email, you can also follow me on Twitter for other thoughts and commentary between these weekly emails. 😉

Be Careful Out There Folks

I’ve been following a story that’s been developing here in the Atlanta area over the last few months.

It’s sad.

But it also makes me mad.

Read the story of financial advisor Chris Burns.

I don’t know Mr. Burns and I don’t know if the allegations leveled against him are true.

But where there’s smoke…

Just a reminder to always be skeptical, especially when an advisor is asking to you invest in any non-publicly traded investment. In this case, he was apparently pitching promissory notes as investments related to companies he owned and controlled.

He had a radio show and was a regular guest on TV programs.

His radio show, in particular, was a selling point to some of Burns’ clients, according to the lawsuit…

In other words, he was demonstrating influence and authority through a radio program and TV appearances.

Is every financial advisor on the radio or on a TV segment a crook?

Of course not.

But I suspect this was part of what sounds like a sleight of hand he perpetrated on many of his clients. Clients that trusted him.

Bernie Madoff recently died in prison.

Looking back, Madoff’s Ponzi scheme seems so obviously rigged.

But his victims, and the BILLIONS of dollars they lost, couldn’t see it over the years they invested with him.

Unfortunately, there’s not a fool-proof way to distinguish the good, trustworthy advisors from the crooks.

But be sure to listen to your gut. Your intuition.

And never forget:

If it sounds too good to be true, it is.

If you have questions about an investment or an advisor, feel welcome to reach out and I’ll be glad to help you verify that they’re legit.

Are You Broke And Rich? Or Loaded And Poor?

I’ll leave you with this 2016 article from David Hulstrom.

I think it’s a short, interesting read that serves as a good reminder that money matters are as much about mindset as they are the actual money.

Thanks, as always, for reading.

Until next Wednesday,

Russ

Retirement Planning for Women

Postscript: For this week's indie music track, give a listen to “June” by Pete Yorn. 🎵

Why indie music? Please read the Postscript of Issue #2 for context.

Disclosures