Compound Interest Really Is The Eighth Wonder Of The World

If you came of age around 2007, chances are you don’t remember a time when banks offered you a significant interest rate on your savings.

Since the Great Recession, central banks have kept interest rates low as a way to fight sluggish growth by encouraging spending rather than saving. It’s partially worked — the stock market enjoyed a historic 14-year bull market — but it’s had the side effect of hurting savers.

Even today, with the Federal Reserve projected to take rates to a 17-year high of 5.25%, the average savings account pays just 0.23%. To put that in perspective, it would take an account growing at 0.23% per year for 313 years to double. The average dividend yield among S&P 500 companies is only 1.6%, which would double shareholders’ money in 45 years through income alone.

Traditional income investments are slightly better. The 10-year Treasury rate, the yield the U.S. government pays bondholders for the ultimate safe haven asset — U.S. government debt — stands at 3.49% today. It would take savers a little over 20 years to double their money at that rate.

By now you’re likely noticing a pattern — little increases in annual returns dramatically shorten the time it takes an investment to multiply in value. Or maybe you’ve heard the story of a little girl asking her grandmother to pay her an allowance of one penny that doubled every day for a month — the little girl is a millionaire by Day 30. What these numbers show is the power of compound interest, or what theoretical physicist Albert Einstein reportedly called the most powerful force in the universe.

Warren Buffett is one of the biggest proponents of compound interest and was once quoted saying, "My wealth has come from a combination of living in America, some lucky genes, and compound interest."

Compound interest is the eighth wonder of the world for investors, but as you can see, it needs to reach a critical mass before people can truly harness it in a normal human life span.

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