Money Mindset

Chapter 5 The Power of Compound Interest and the Erosive Effect of Inflation

So far in Money Mindset I have stressed the importance of having a plan to accomplish your financial goals. After you determine your goals and construct your plan, the wealth management process begins to unfold. There is a lot to learn and digest about the process, and in upcoming chapters I will break down for you the impact of taxes and asset allocation, how to evaluate your risk tolerance and build an investment portfolio, and finally, how to monitor your portfolio and rebalance it when needed.

But first, this chapter discusses the power of compound interest and the erosive effect of inflation. Remember, you need to have the right financial mindset in order to meet your goals and have your investments live up to their full potential.

The Power of Compound Interest

Albert Einstein, a Noble Prize Laureate in physics who studied the biggest mysteries of our universe, said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Let’s explore the power of compounding by learning the mathematical Rule of 72.

The Rule of 72 is a simplified way to estimate how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, you can get a rough estimate of how many years it will take for the initial investment to duplicate itself. For example, the rule of 72 states that if a $100,000 ...