Why Warren Buffett Loves Compound Interest: The ‘8th Wonder of the World’?
It was the renowned scientist and theoretical physicist Albert Einstein who said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” These words are reflected by investor Warren Buffett, who is most associated with the basic wealth building strategy.
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The concept behind compound interest is simple. Defined by the Consumer Financial Protection Bureau, “Compound interest is when you earn interest on the money you’ve saved and on the interest you earn along the way.”
Buffett explains it’s power in even simpler terms in his autobiography: a snowball rolling down a long hill, picking up more snow as it gains momentum until it becomes a massive snowball. The Berkshire Hathaway chairman and CEO loves compound interest because it works alongside his investing philosophy, and as one of the wealthiest people in the world, the 93-year-old is an example of compound interest’s real-world success.
Here are some of the reasons why compound interest is the “eighth wonder of the world.”
Wealth Grows Exponentially
Compounding increases the value of the money you have invested by getting the interest earned added back or reinvested to the principal, generating even more earnings. This is the concept that makes the snowball grow larger every day. Principal grows faster the more frequent interest is compounded. Compounding works especially well when it’s allowed to build over time, something Buffett learned at an early age.
Save and Invest Early
Compound interest encourages and rewards individuals to start investing early to maximize growth over many years. We all have to start somewhere, and while Buffett is an exception — he bought his first stock at the age of 11 — compound interest uses the power of early action, time and will, which is fundamental to success.
Buffett Loves the Long Game
The key to Buffett’s success is long-term thinking, exemplified in one of Buffett’s most famous quotes about knowing he would reach wealth, yet not being in a hurry to get there. Notoriously patient, the wealth of Berkshire and Buffett is associated with the importance of value growth over time. Berkshire’s portfolio has held onto some stocks for close to 30 years.
Set It and Forget It
One of the great things about compound interest is that it does much of the work without requiring any intervention from the investor. As long as an investment is paying interest, nothing can stop the snowball from doing the work and growing on its own. This aligns with Buffett’s hands-off approach with many of his stocks.
Compound Interest Doesn’t Discriminate
Of course, the more money you start with, the more you’ll make through compound interest over time. You don’t need to start with a lot, though, you just need to start. Regardless of your bank balance, job or background, anyone can build great wealth with time and consistent investing.
Rewarding Patience Through Investing
In an impatient world, investors are looking to get rich quick. Some are fortunate enough to make millions by catching lightning in a bottle; however, compound interest is a proven wealth builder that doesn’t rely on luck. It may sometimes take longer to see the results of your effort, but this doesn’t mean that the effort is going to waste.
With patience and consistency, compound interest can reap great rewards.
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