Is Compounding Interest 'The Most Powerful Force In The Universe?'
Tony Isola is an investment advisor representative with Ritholtz Wealth Management and author of an informative financial blog, Tonyisola.com.
On Thursday he discussed why compounded interest is "the most powerful force in the universe" — at least in the financial universe. Properly understanding and making use of compounded interest is what separates the rich from the poor, and those who fully understand how to apply it "may live the life of their dreams."
Isola cited William Poundstone, author of "Head in the Cloud: Why Knowing Things Still Matters When Facts Are So Easy to Look Up," who said that proficiency in understanding compounded interest is not only a predictor of income, but wealth and happiness.
"Both debt and investment returns are calculated using the geometric method," Isola added. "If used correctly, this is the path to great wealth. Ignorance of this concept often leads to accumulation of great debt and bankruptcy."
So, just how powerful is compounded interest? As noted by Poundstone, "A worker who starts saving at age twenty-one has a shot at earning more return on his investments than the sum total of his lifetime wages."
Naturally, it is never too late to begin making full use of proper investment methods. People are living well into their 90s these days, so individuals still in the 50s or 60s have plenty of time ahead to take advantage of time in the market, not timing the market.
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