By Tua | September 22, 2018

"Compound Interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it"

- Albert EinsteinThere is undeniable mathematical proof behind why the earlier you can begin doing something, the better. This principle was discovered and is most easily demonstrated in the field of finance, but the concept is applicable to anything that is habit forming or requires practice.

It’s called: 'Compound Interest', it’s the Interest earned on Interest.

To explain, let’s say you have a $1000 Credit Card bill with a 20% APR compounding daily. If you only make the minimum payment, perhaps $10, your credit card debt begins accumulating interest and more importantly, compounding Interest, on the remaining $990, every day. By the time your next credit card bill comes around 30 days later, your initial $990 Credit card debt has grown to $1006.40. Your debts’ accumulated $16.27 in Simple interest, and 13 cents in Compounding Interest. You might want to gawk at the miniscule 13 cents compared to the amount of simple interest, but it’s absolutely critical to realize this 13 cents was self-generated! It came to be simply through having debt, and it increases exponentially. In this example, if you continued to only make the minimum payment of $10 per month, in less than 4 years you would be paying more in Compounding Interest than in Simple Interest, and you would never pay off your credit card bill! This might sound scary, and it is. It’s one of the reasons why being trapped in credit card debt is so hard to get out of, and there are laws in place preventing “Criminal Rates of Interest” to protect borrowers. But now lets the flip points of view, instead of owing $1000, let’s say you put $1000 into a high interest savings account at 1% Interest with monthly compounding. At the end of the first year, your $1000 has grown to $1010.05; you’ve earned $10 in Simple Interest, and 5 cents in Compounding Interest, money earned simply by having money in the bank.

You might be asking: “How could this apply to anything other than interest?”, here’s where things start to get trippy: Constructivism Learning theory suggests your brain only learns new concepts through relating them to ones previously learned. In other words, the foundation of your understanding of a new subject is based on what’s already in your brain. The benefit of starting early, or even starting out at all, is that you get exponentially better at a new skill every time you practice it. When you learn something new, the understanding of everything else you’ve learned is enriched by what you’ve just learned; your memory is continuously compounding experience. Your brain finds new connections between related subjects, and you begin seeing familiar concepts in new ways.

References

Constructivism Learning Theory: https://www.learning-theories.com/constructivism.html