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hey /biz/, I was wondering if anyone could explain the actual importance of compound interest
It's something that Warren Buffett has praised as a key to his success, all wise men seem to have some reverence for it, but one can take the time to learn the math, the formula involved, and still not completely understand its practical purpose?
I get that we're talking about long periods of time. But whenever you talk about interest rates that would actually be beneficial in this lifetime, the phrase "of course you'll never find rates like THAT with actual banks." always seems to cancel out it's applicability. How does compound interest apply to investing, in the real world?
Sorry for bad English, I'm from Pennsylvania.
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>>1255724
It's a sort of "trick" to get you to invest with that bank/establishment/whatever
But you can absolutely benefit too. With like an 8% compound interest rate you can turn 80K into 450K in 20 years, with your initial investment doubling in 9 years.
The only thing is you wanting to invest boatloads of money for years and years for your older less sexy self instead of use 80K for all kinds of other shit in your 20s, if you even got it.
(dont pick apart my math we just happened to do this problem at college this week)
It's not really a bad deal, just incredibly long term.
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>>1255724
here ya' go
http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
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Reinvesting dividends from stocks.
Reinvesting interest from bonds.
Reinvesting profits from your business.
Buying more real estate with your rental income.
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>>1255730
I can understand that much, that if you keep doing that, your assets will grow literally exponentially as long as you don't withdraw.
But another thing that doesn't make sense to me is when Buffett talks about it in the context of "if only so and so had invested a little more WAAY back when, it would be worth a gajillion dollars today" kind of scenario, here I even found the quotes: http://www.safalniveshak.com/wit-wisdom-warren-part7/
He says "Francis I of France paid 4,000 ecus (European Currency Units) in 1540 for Leonardo da Vinci’s Mona Lisa ... the fluctuations of the ecu 4,000 converted out to about $20,000. If Francis had kept his feet on the ground and he ... had been able to find a 6% after-tax investment, the estate now would be worth something over $1,000,000,000,000,000.00. That’s $1 quadrillion or over 3,000 times the present national debt, all from 6%."
So, is there some magical bank that french guy coulda went to in order to get an interest rate like that? I get that I'm missing something.
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>>1255741
No, he could not have gone to bank and get that rate. Pre-1800, 0.5% economic growth was fast. Pre-1914, 1%-1.5%. 6% interest for any investment except risky ones would have been very difficult before modern economic tools.
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