203- The Most Powerful Force in the Universe
By: Paul A. Werlin, President, Human Capital Resources, Inc.
Ok, I know what you’re thinking: nuclear bombs, fusion energy (powers the sun) or gravity. Or maybe you’re more romantic or philosophical and believe “love” is the most powerful force. But I will defer to Albert Einstein and his quote: “The most powerful force in the Universe is compound interest.” He referred to it as one of the greatest “miracles” known to man. Simply stated, compound interest is interest added to the principal of your investment so that from that moment on, the added interest also earns interest. So, how powerful is it, and if it’s so powerful, how can I use it to my advantage?
Well, as Einstein said, it’s really powerful, but its power is fully revealed over long time periods. For example, say you invested just $100 a month every month for 20 years at just 5% interest rate. This is not a bad idea for new parents saving for college, and most people really won’t miss those expensive lattes or occasional high-priced bottles of wine, and really don’t miss $100 a month. So, what is $100 a month at 5% over 20 years? It’s $41,549, a pretty good chunk of money. Now, let’s say your son or daughter gets a full scholarship and you decide to keep saving the measly $100 until you retire, let’s say another 15 years- you now have $114,671! And one more example- if you saved $100 a month for ten years, then increased it to $200 a month for then next 10, and finally added $300 for the last 15 years, you’d have $201,320!
Now, in today’s interest environment, it really isn’t possible to get a guaranteed 5% with total safety. But, there are excellent, high quality investments that have consistently paid strong and increasing dividends (see my past article on Dividend Aristocrats). Yes, there is risk in owning any stock. But companies like AT&T paying 6.64%, and Exxon Mobil are paying 5.9% in dividends, and you can set up systematic investing programs with many brokerage firms so you can buy additional shares every month (even small amounts like $100). And, as I have mentioned in another previous article ( Free Money), you can set up “systematic investing” programs so you can buy additional stock every month or quarter, usually commission free and sometimes, even at a small discounted price. Now you too can get the power of compound interest and use it to meet your financial goals.