Expert Advice

How Money Grows

Charley Ellis details the phenomenal rule of compounding, and how it allows everyday investors to retire with more.

Charley Ellis: Compound interest is really powerful stuff, as we all know. Einstein said it was one of the most extraordinary things he’d ever heard of. Now, the reason it’s so powerful is, it’s working for you, that’s a positive. It’s working against you, that’s a negative.

Watch what happens when you take out credit card debt, which is the worst mistake anybody can make from an investment point of view. Eighteen percent interest, compounded. How fast does that add up?

Easy way to do it is to use the Rule of 72, which I think is a wonderful convenience. Divide 18 into 72. It tells you how many years it takes to double. Works out to be about four years. Okay. So four years it’s doubled. Four years later it’s re-doubled. Four years after that it’s up, re-doubled again.

That compounding builds and builds and builds. If it’s on your side and you’re earning those compoundings, super. But nobody, nobody can invest and compound at 18%. That shows you how bad it is to be borrowing and having the other guy compounding at 18%.