QOTD: When Your Interest Earns Its Own Interest

Let’s say you decide to invest $100 and you have the ability to get a 10% annual rate of return. At the end of 1 year you will have your $100 in principal and an additional $10 in interest. Nothing special. However, as you continue to compound your money, the process starts to behave fractally. How? In year 2, when your $100 once again gives you $10 in interest, now your $10 in interest from year 1 will throw off $1 in interest as well. The $10 has begun to behave like the $100 did in year 1. You can imagine the relationship between the $10 and its $1 in interest like the $100 and its $10 in interest. And this process continues in year 3 when the $1 in interest from year 2 throws off $0.10 in interest, and so on.

The beauty of compound interest is that it continues to behave fractally with each piece of interest eventually earning its own interest.

I worship at the altar of compounding. You should too. I don’t just mean as it pertains to money, but as it pertains to all things – relationships, practicing an instrument, exercise and athletics, reading and building knowledge, etc.

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