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Never Underestimate the Power of Compound Interest

August 07, 2023

The long-term effect of compound interest is incredible. Albert Einstein once famously said that compound interest is the most powerful force in the universe: “He who understands it, earns it; he who doesn’t, pays it.” Compound interest is a really simple concept in theory- it allows you to earn interest on your interest compounding over time, assuming you don’t withdraw your money. This results in your money growing at an ever-accelerating rate, allowing your money to work for you. Today, I’d like to share a story about Benjamin Franklin and his bequest to the cities of Boston and Philadelphia. It’s perhaps one of the greatest examples of the power of compound interest in modern history.

A year before his death in 1790, Benjamin Franklin left $1000 (the equivalent of $4,400 today) to the cities of Boston and Philadelphia under the condition that the money be loaned and invested to young apprentices that had proven themselves worthy of a loan. He wanted to prove just how effective compound interest could be over the long term, while simultaneously leaving a lasting legacy for Boston and Philadelphia. He stated that the money was to be invested and could be paid out at two specific dates:
1) After 100 years each city was allowed to withdraw $500,000 for public works projects
2) After 200 years, in 1991, each city was to receive the balance

The Result?

After 200 years, Boston’s fund had swelled to $4.5 million and Philadelphia’s had grown to $2 million. The $1,000 pounds Franklin invested in each city had grown to a combined $6.5 million. Yes, $6.5 million! Analysts say the difference in return was in each city’s approach to the legacy. Boston tried to minimize risk, and maximize proceeds while Philadelphia focused on Franklin’s instructions to loan money to individuals. Overall, Franklin’s experiment, turning $1000 into $6.4 million, is just a tremendous example of how powerful compound interest can be. The earlier you invest your money and longer you keep your money invested, the more compound interest can make a significant impact your investments. Furthermore, how you reinvest that money can greatly affect your return.

Start Saving Early

Rest assured, you don’t need to wait 200 years for a significant return and we can do similarly powerful things with compound interest over a shorter term. The numbers prove that if you have the discipline to make regular deposits paired with the patience not to touch your money, you can turn a little into a lot. The true takeaway from Franklin’s experiment is, it doesn’t matter how much you start with – just that you start saving as early as possible. The expression, “The best time to plant a tree was 20 years ago, the second best time is now,” is also true for maximizing the benefits of compound interest. The earlier you start, the more powerful your savings become. Even if you start with only a few dollars out of every paycheck, it can significantly change your life down the road if invested properly. Click here to see how I started teaching my kids about the importance of saving at an early age.

Franklin’s Legacy

Franklin’s financial advice has survived the test of time and and the value of compound interest has, too. Even Warren Buffett, one of the most successful investors of present day, has attributed his wealth in large part to compound interest. He states: “My wealth has come from a combination of living in America, some lucky genes and compound interest.” Never underestimate compound interest – having it work in your favor is a key fundamental to building your own personal wealth. So save early and often and remember: “Money makes money. And the money that money makes, makes money.” -Benjamin Franklin

Your Williams Financial Group Team

Jon D. Williams
CFP, CIM Senior Investment Advisor
Williams Financial Group | Manulife Securities Incorporated
(519) 646-1010