Einstein and Personal Finance

Last Updated on

He never said it!  Said what?

  • “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
  • “The most powerful force in the universe is compound interest”
  • “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.”

Einstein’s discoveries influence every  (believe me, every) conceivable aspect of human existence. He however never said anything about compounding. There is no record of it. These are yarns spun by financial gurus to catch peoples attention. To lend credibility to their claims. Over time these claims have compounded to different forms! Do you need a genius to sell commonsense? Unfortunately yes!

Wonder if he actually said this!Source: http://www.signsfunny.com/2013/02/14/albert-einstein-about-his-quotes/
Wonder if he actually said this!
Source: http://www.signsfunny.com/2013/02/14/albert-einstein-about-his-quotes/

Compound interest is not even high school math. It is lower-middle school math. Easy enough to remember and misunderstand. In its simplest avatar it reads:

Future value of a sum = (Present value of a sum) X(1+return)(No of years invested)

The (no of years invested) has been ‘raised to the power’. (The power of compounding!)

Consider this:
(1)2 = 1X1 =1
(1)5 = 1X1X1X1X1 =1
(1)100 = 1X1X …. =1
(1.01)100 = 1.01X1.01 … =2.7!
Or Rs. 1 invested for 100 years earning a return of 1% each year grows to Rs. 2.7. Of course you need to increase the sum invested and rate of return so that the number of years invested can come down but the idea remains the same. To maximize the ‘power’ of compounding, the number of years has to be as large as possible so one has to start early.

Getting back to Einstein,his behaviour in the latter part of his career resembles that of many retail investors. Having made extraordinary strides in understanding the nature of our universe (relativity, quantum mechanics  to name just two), Einstein focused his attention on developing a ‘grand’ theory. A single framework which will explain all physical phenomena. He never succeeded. A grand or optimal theory is possible only if we have discovered everything that can be discovered which is of course never!

Many retail investors share Einstein’s obsession of finding the optimized solution and spend an inordinate amount of time doing so. This could be the ‘best‘ life insurance or health insurance or mutual fund. They are never sure of their choices. Always asking for opinions from everyone ending up more confused than ever before.  If someone spends six months searching for a term insurance plan, in the eyes of most insurers he/she has aged by one year! This of course means more premium. Every day lost in searching for the best mutual fund chips a little away from the advantage of beginning early (assuming one does so in the first place). At least this is the wrong strategy with the right product. Those who search for the ‘best’ child plan or pension plan get both wrong!

Optimal solutions are rarely possible. All one can do is look at ones personal situation, consider the points to remember while choosing a product and just go for it. A reasonable choice is all that one can come up with most of the time. The crucial thing to remember is education doesn’t stop with making the choice. You continue learning, make course corrections as and when necessary. This is how science progresses. This is how a retail investor can and should achieve financial goals.

Note:

  • Einstein’s approach may have been wrong but he could afford to be wrong and waste time. He was tenured for life. Meaning he earned (a pretty decent amt) all his life without having to worry about the underlying assumptions of a retirement calculator 🙂
  • While we are it, might as well add that an apple never fell on Newtons head!
Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

13 Comments

    1. Thanks. Newton and the apple are part of a rural myth. Newton was fascinated with gravity because of existing data at that time. He made all calculations and promptly put it someplace. His contemporaries convinced him to publish it and he had do it all over again. Btw I am sure you must have read about Newton’s experience with the stock market in the ‘Intelligent Investor’.

  1. The most uncommon thing is asking some one to use his/her common sense. People are too much busy in looking for 100% perfect product & in the process forget the very basic. god save all these people. Amen.

    1. Not ‘might not have’. He never did. There is no record.
      Calling compounding interest an 8th wonder of the world is utter nonsense. It is trivial middle school math. If it is the 8th wonder, commonsense is the zeroth wonder.

      Options have always been there. MFs have existed since 1960s. The trouble is asking wrong questions. Where should I invest for retirement or my child’s education is a stupid question. Diversification is the key. ‘How much should I invest where? is the question to ask.
      Thanks for sharing the infographic. It is pretty good.

  2. Searched the net to verify if Albert Einstein did or did not say. Found this link on what is called as Quote Investigator http://quoteinvestigator.com/2011/10/31/compound-interest/ Quoting from it
    QI hypothesizes that an anonymous advertising copywriter initiated the idea that compound interest was the world’s greatest invention or man’s greatest invention.
    QI was unable to find any support for the attachment to Einstein, and QI believes that it is very unlikely that Einstein made this remark.

    Sometimes a comment is attributed to a famous individual to increase the prestige and believability of the comment. Also, a quotation from a famous person is often considered more interesting and entertaining. Inaccurate attributions are readily propagated.

Leave a Reply

Your email address will not be published. Required fields are marked *