Compound Interest

January 17, 2008 1:14pm CST
R.Kiyosaki says in the chapter(8) on Overcoming Obstacles as follows: "It is said that one of the wonders of the world is the power of compound interest" and then goes on to relate the story of the purchase of Manhatan. I want to discuss this subject from two important angles:(i) compound interest as wealth building tool (ii) compound interest as leverage. For my first purpose, I will have recourse to George Clason.In his masterpiece, The Richest Man In Babylon, he says under the Third cure :make thy gold multipy- "Gold increaseth rapidly when making reasonable earnings as thou wilt see from the following: A farmer, when his first son was born, took ten pieces of silver to a money lender and asked him to keep it on rental for his son until he became twenty years of age.This the money lender did, and agreed the rental should be one-fourth of its value each four years.The farmer asked , because this sum he had set aside as belonging to his son, that the rental should be added to the principal. "When the boy had reached the age of twenty years, the farmer again went to the money lender to inquire about the silver.The money lender explained that because this sum had been increased by compound interest, the original ten pieces of silver had now grown to thirty and one-half pieces. "The farmer was well pleased and because the son did not need the coins, he left them with the money lender.When the son became fifty years of age, the farmer meantime having passed to the other world, the money lender paid the son in settlement one hundred and sixty-seven pieces of silver. "Thus, in fifty years had the investment multiplied itself at rental almost seventeen times" Here we see compond interest helping to build wealth. (ii) Compound interest on the other hand can work against one.If you borrow money from a money lender and fail to service the loan, compound interest will work against you in helping to rapidly increase the amount owed because interest will be charged on the unpoaid interest as well. I FIND THAT KNOWLEDGE OF THE WORKINGS OF COMPOUND INTEREST IS ONE OF THE ESSENTIALS OF FINANCIAL LITERACY. Have you had any encounter with the workings of this non-tangible tool? Did it leverage for against you? Share your experience with us.
1 response
@danzer (2732)
• Philippines
17 Jan 08
You are definitely on your way to financial literacy. It's good to find that there are people like you and me interested about money. I can't see compound interest to be against you. I think it will be of help to anyone who invested in a long-term investment program.
• Israel
18 Jan 08
Thanks for your comment. You are right.Compound interest is your friend and works relentlessly for you when you save or lend. It is however your enemy if you have borrowed money wrongfully or foolishly and cannot service the loan.Many have woken up to find that a loan of say One thousand Naira has suddenly become Two thousand Naira because they failed to service it and the lender, meanwhile, has been busy charging interest not only on the principal but also on the defaulted interest. Compound interest is the very reason why you should never borrow unless you are sure the purpose for which the loan is sought will not only return the money but also the interest you are likely to incurr on the loan and do so TIMELY. Dudumodu