What is Compound Interest?
The magic of Compound Interest, per my 99 year old grandma (2min read)
Welcome back!
This newsletter took August (ok and September) off. This fall, we're going to go back to school (just like me!). We'll cover some basic topics in finance like compound interest, corporate finance, and investing. We'll use examples from centralized finance and decentralized finance.
We'll kick it off the series with a fundamental idea - compound interest.
What is Compound Interest and How Does it Work?
Growing up, my Irish Catholic grandma gave each of her grandkids US Savings Bonds for Christmas. 10 bonds worth $100 each.
My grandma could have given us cash to spend, save, or invest. But, she knew the value of compound interest. She gifted us bonds that we could not spend for 30 years.
Over that time period, US Savings bonds paid 6.5% annually.
Simply put, $100 one year turned into $106.5 the next.
The following year, I earned another 6.5% but this time on $106.5. Now, I had $113.42.
This is compound interest at work.
And this happened for 30 years.
I kind of forgot about the bonds. 30 years later those $1000 worth of bonds are now worth over $5,000.
Why Does Compound Interest Matter?
Why do we invest? In part, the magic of compound interest.
When investors say "set it and forget it" in part, they mean money is good at making money. It’s one reason why it’s easy to make money when you have money (and the wealth gap persists). And, it’s why savings and investing are so important for all of us.
You might be asking yourself - government bond's haven't made 6.5% since 1990. And yes, that is true. But, the concept still holds, whether you're investing in the stock market, DeFi interest accounts, or a bank account.
The magic of compound interest.
PS - Not investment advice, but my 99 year old grandma, who was born during the Great Depression, is still 90% in stocks. Like Warren Buffet, I swear she can just see how much that money will turn into.
Additional Reading:
Berkshire Hathaway, Acquired.fm
Shoutout to Michael Longmire for the photo!