- Published on
- Jessie Jimenez
Turn this curve
Into this curve?
Let's say that you are like Maria from last week; you have $10 to lend.
But you lend it to the US government, because it's pretty safe you will get paid back with interest.
This is called buying a bond. Your $10 investment is like a money plant.
The government agrees to pay you a dollar interest every six months.
So every half a year, your plant grows some fruit. This is the dollar in interest that the government is paying you to use your $10.
You now have a choice. You can spend the interest or you can plant it.
You're reinvesting that dollar by lending it to the government. Your interest will start to grow a new money tree.
After some time, your interest money tree will also grow fruit. You are earning interest on the interest.
Now you get fruit from your original $10, (the principal), AND your $1 in interest. There are 2 plants where there was one!
Two plants becomes 4 plants, as both your principal and interest plants have babies.
You can replant every time your interest grows fruit. This cycle is compound interest.
By the time you go to get your $10 back, your money has grown a ton, and most of it is from interest, not the principal.
Tune in next Saturday to find out why vampires are always rich, and what this has to do with compound interest.
Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor