The simplest compound interest formula is as follows: income = principal ×( 1+ interest rate) periods.
There is a simpler 72 rule.
In fact, the so-called "72 rule" is to use 1% compound interest to calculate interest. After 72 years, the principal doubled. The advantage of this formula is its fast calculation speed.
For example, the annual interest rate is 8%, and after 9 years (72/8), the principal will double; The yield of 12% will double in about 6 years (72/ 12).
1. The initial growth is always too slow to detect (as shown above).
You need to wait for a long time before the inflection point comes. Once you break through the inflection point, the growth is very rapid (exponential change), and the change will be so great that you will be shocked.
It is very difficult to maintain long-term stable compound interest.
1. Compound interest of wealth
Regarding the compound interest of wealth, give a simple example in life: the interest calculated by your money in the bank is simple interest, while the interest calculated by your credit card debt is compound interest.
2. Compound interest of knowledge
What kind of knowledge can generate compound interest is very important for personal growth.
The compound interest of knowledge means that creative (regenerative) knowledge can produce new knowledge and new ideas.
Creative knowledge (unproductive) can not produce new knowledge, but can be copied in batches. There is a lot of uncreative knowledge in search engines and social networks.
For example: you read this article today and have mastered the thinking mode of compound interest, which can be used continuously in places such as study and investment in the future; And if you watch China Parisian Boyle Fighting Hip-hop? After reading this joke, you can only chat with others, and then what?
Knowledge such as thinking method and thinking mode is creative knowledge. When you get the way of thinking and master the mode of thinking, you can move to different fields and continue to use it. And a lot of cold jokes, cold knowledge and so on. There is no creative knowledge, and you know that you can't transfer it to other fields.
No matter the compound interest of wealth or knowledge, it can't happen without the catalyst of time. When you are impatient or lose confidence, think about the compound interest curve, then continue to act and wait for the turning point.
Einstein said that compound interest is the eighth wonder of mankind. Munger also regards compound interest as one of the most important modes of thinking. He said that "understanding the magic of compound interest and the difficulty of obtaining compound interest is the core and soul of understanding many things".
When you have the thinking of compound interest, you can transform your life in different dimensions.
Become richer. Now start managing money and invest some money every month and every year.
For the sake of health. Now start doing some exercise every week.
In order to become an expert. Start focusing on a certain field now and practice deliberately every day.
In order to improve cognition. Start studying now and form a good habit of lifelong learning.
In order to have good social relations. Now we begin to maintain the feelings between relatives, friends and colleagues regularly.
Compound interest is the most basic model to guide us, and many useful concepts in life are based on the concept of compound interest. A good way to better understand the concept of compound interest is to explore its relationship with other concepts.
Exponential distribution and normal distribution represented by compound interest represent a considerable part of the laws of this world. Usually, people's height, weight and age meet the normal distribution, while the accumulation of wealth and knowledge meets the exponential distribution, which is suitable for the concept of compound interest.
This is also the reason why mediocre people emphasize fairness and excellent people emphasize opportunity.
Most people will never use compound interest in their lives, and they will not realize its power. The thinking of compound interest requires us to look at things from a developmental perspective and a long-term perspective.
Compound interest is the most basic model to guide us, and many useful concepts in life are based on the concept of compound interest. A good way to better understand the concept of compound interest is to explore its relationship with other concepts.
1. Matthew effect
In order to learn English well, you work harder than others at first, and after a period of time, your English is a little better than others, so the company will call you when it needs to have a meeting with English customers, and will be more inclined to look for you when there are training opportunities, so you will get more opportunities to practice English than others, and in turn your English will be better. After a period of repeated reinforcement, you will find that you have greatly surpassed others.
Matthew in the New Testament says: If you have more, give it to him, so the more the better. This is what we often call Matthew effect, which is a powerful effect of compound interest.
In order to find a good job, you decided to lose weight and learn a foreign language. You chose to study Spanish instead of French. At this time, you will give up some job opportunities that require French, and the compound interest effect you may have during that time can no longer be used in French, so the opportunity cost is an important factor to consider when choosing the compound interest direction. This is why it is more important to keep the principal in investment than to seize the opportunity, because without the principal, it means losing the opportunity to turn over, which means that when you meet an investment opportunity, you can't even grasp the low opportunity cost.
Therefore, Buffett said that there are three iron laws for investment: "investment rule one, try to avoid risks and keep the principal;" Second, try to avoid risks and keep the principal; Third, keep in mind the first and second rules. "
When you understand the powerful power of compound interest effect, you must be eager to use it. Maybe you want to start many things at the same time, such as fitness, musical instruments, reading and so on, so as to prolong the time of compound interest. There is nothing wrong with this in itself, but you can't ignore the principle of putting things first. Starting a number of complicated affairs at the same time may cause you to finish nothing, that is, compound interest has not accumulated enough time on anything.
So please put down this delusion, stick to the principle of putting things first, put only one thing in the most important position at a time, and ensure that you can fully enjoy the fruits of compound interest effect on the most important thing for you, which is far more practical than going hand in hand. For myself, when I have the impulse to learn many skills, I will make sure that one thing is the only thing that matters. If one day I only have the mood or perseverance to do something, I will always ensure that it can go on.
Interest rate is equivalent to the concept of speed to some extent, and it is not easy to keep moving at a constant speed. But there are always a few people in the crowd who can improve their speed, that is, have acceleration. Corresponding to compound interest, interest rates are rising with time, which requires a breakthrough in thinking from time to time. Their secret is to master the first principle, so that when we look at things, we can go back to the origin of things and get the possibility of acceleration.
Critical mass refers to the mass of fissile material needed to maintain nuclear chain reaction. By analogy, when knowledge and technology accumulate to a critical point in the field of science, new technologies will explode and expand rapidly like fission reactions. This extended curve is exactly the same as the compound interest curve, and the compound interest curve also has such a critical point, which is the tangent point and the maximum angle of this curve. After this, you really begin to enjoy the benefits of compound interest.
Exponential distribution and normal distribution represented by compound interest represent a considerable part of the laws of this world. Usually, people's height, weight and age meet the normal distribution, while the accumulation of wealth and knowledge meets the exponential distribution, which is suitable for the concept of compound interest. This is also the reason why mediocre people emphasize fairness and excellent people emphasize opportunity.
The interest is calculated with compound interest 1%. After 72 years (72 is an approximate value, the exact value is 100ln2), the principal will be doubled. This rule is called the 72 rule. This is an inexact fast algorithm. For example, after compound interest 10% and 72/ 10=7.2 years, the principal will double.
According to the different trigger conditions of the loop, all the enhanced loops either increase exponentially or decrease exponentially.
Sometimes attention should be paid when the time observation span of the system under study is particularly long. It may seem to grow linearly in a short time, but in a larger time span, this straight line is only a short period of time, and the first impression may be misleading. It is actually part of the exponential curve.
May your life enter the road of compound interest as soon as possible.