Financial Living Blog

Gravitational Waves, and the Power of Compounding

Feb 17, 2016 8:35:17 AM

“The strongest force in the universe is compound interest.” –Albert Einstein

Gravitational_Waves-image.jpgOn February 11, scientists announced they directly observed gravitational waves for the first time. It was the result of two black holes merging into a single, massive black hole, the force of which generated 50 times the energy of all the stars in the universe put together and sent shock waves across a billion light years before reaching Earth.

“This is like a new window into the universe,” said Columbia University astrophysicist Zoltan Haiman.

The existence of gravitational waves was first predicted by Albert Einstein in 1916 in his seminal theory of general relativity. According to Einstein’s theory, any object with mass bends the fabric of space-time. Picture a rock thrown into a pond creating ripples on the surface.

Einstein had an insatiable curiosity and seemingly innate intuition about the forces of the universe, none of which may have amazed him more than compound interest. He famously called compound interest the eighth wonder of the world.

Compound interest is when the interest you earn on an amount of money in turn earns interest itself.

Since retirement accounts such as 401(k)s and IRAs are investment vehicles rather than just savings accounts, they have the potential to provide accountholders the benefit of compounding. This can have an incredible impact on your retirement savings. It is why you should start saving for retirement as early as possible.

The chart below shows compounding at work. Let’s say you invest $10,000 and earn a 6% return, increasing your balance by $600 the first year. That means you’ll begin the second year with 10,600, which now grows by $636 with a 6% return. Fast forward to year 20, your balance will have increased by more than 200% ($20,000) and you’ll earn more than $1,800.

How Compounding Works

How_Compounding_Works chart

Source: Vanguard. The information presented is for illustrative purposes only, and is not indicative of any investment, nor should it be construed as investment advice. Past performance is no guarantee of future results.

Of course, this hypothetical example doesn’t include any additional contributions. The more you consistently put aside from your paychecks for retirement, the more you can benefit from compounding.

Compound interest is a force more powerful than even gravitational waves. The coolest part? You can harness it to rocket boost your chances of living your dreams.

    
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