Albert Einstein once said; “Compound interest. Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
By understanding compound growth, you can quite literally change your financial position in a few short years.
At school, a friend of mine once had the great idea of doing a long-distance charity run. His goal was to help an orphanage in need. His dad was a fantastic business man and used this to teach him a lesson in money. He said that he would give my friend 10 cents for the first kilometre and double it for each kilometre going forward.
At first, he was completely disgusted by his dad’s proposal. He thought it was a pathetic donation. My dad on the other hand said he would give R30 per kilometre. I began to gloat, as my dad was obviously more supportive. It wouldn’t be until the race that we would realise my friend’s dad was indeed teaching us a valuable lesson about money.
The Compounding Effect
Let’s do the math together quickly. After the first kilometre he had earned 10 cents from his dad and R30 from mine. The second kilometre gave him 20 cents and another R30 from my dad. The 5th kilometre was worth R1,60. What do you think the 15th kilometre was worth? Perhaps R20, or R40 or even R100? The 15th kilometre was worth R1683,40.
By the 18th kilometre his fuel tank was nearly empty but, his determination was full, as the amount of the 18th kilometre was R13 107,2. He finished the race just short of the 19th kilometre. The total contribution that his dad would make was R26 214,3. The total contribution that my dad made was R540. His dad was surprised to hear that he had made it all the way to 18 kilometres and confessed that it was way higher than he expected, but he stayed true to his commitment and paid the full amount.
That is the power of compound interest. It’s a law of nature and something we see around us all the time. There is a tree outside my parents’ house that eight years ago was merely a seed in the ground. After two years it was a twig giving shade to a few insects. After another two years it was a small one-meter tall tree. Another two years later and the tree reached five meters tall. I saw it recently, a total of eight years later, and the tree was over 10 meters tall. This is exponential growth. It seems like it’s growing at a snail’s pace, but after enough time has passed, your growth is greater than you could ever imagine.
This is how the property game can work for you. If you invest in cash flowing properties you can hold onto the properties and the appreciation over time will make you wealthy beyond your dreams.