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Understand the Importance of Compound Interest and Time

Time is the only tool that is on everyone’s side equally, but you must have the discipline and foresight to use time to your advantage by investing early and not stopping for “diversions” in your spending and your goals. After all, as Albert Einstein commented, “Compound interest [which is interest on interest] is the eighth wonder of the world” (as quoted in Charles T. Munger, Poor Charlie's Almanac: The Wit and Wisdom of Charles T. Munger, Doning Company Publishers, 2005, p. 60). We should capitalize on this eighth world wonder.

Interest is similar to rent. Just as tenants pay rent to landlords in exchange for the use of an apartment or house, people will pay you interest in exchange for the use of your money. You can either invest your money yourself or you can lend it to others who will then invest your money and pay you what you would have earned had you invested the money yourself.

The key investing principle states that a dollar in hand is worth more than a dollar received in the future. This principle is true because you can invest that dollar today and begin earning money on it. The sooner your money can earn interest, the faster your interest can earn interest, and the more money you will have.


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