Compound Interest

Unless Warren lives in another galaxy far away, where the laws of Physics as we know them do not apply, I would suspect that he uses the same basic mathematical functions most people in the financial sector would use.

Although I have no way of knowing exactly what type of calculations Warren would use, or the calculator he uses, the type of calculations used in finance, have been in use for over a thousand years. They are quite straightforward and my old BA-35 can perform most of them.

The Secret of Compound Interest

The secret to many great fortunes in America is compound interest. To quote the famous line spoken by Gordon Gekko:

"The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons – and what I do, stock and real estate speculation."

Compound interest is exponential growth where your money can actually work for you, and when you realise the power of it, you too will become like Warren and start being thrifty.

If you are one of my whippersnappers reading this, then it is time for you to get your parents to open an account for you so that you can start saving straight away. When you get to Warrens age, you too will be a millionaire!

Example 1: If Jesus invested a pound

1Clear Memory
211Present Value
322Interest Rate
420102010Years Invested
6Future Value
71.933505 × 10 Power 17Answer

If Jesus had £1, and he invested it in a bank offering a modest return of 2 % interest, how much money would he have accumulated in 2010, when he came back to collect it?

The answer to this is very simple, because this is an exponential growth question. There would not be enough money in the whole world! The sum wealth of all the nations in the world would not be able to cover it. This is a powerful bit of mathematics, and I would not go around telling Warren about it. He is only likely to go looking into Human Cryogenics to find a way to come back after 2000 years. :-)

The combined wealth of Bill Gates, Warren Buffett, Steve Jobs, the British Queen, and the Rothschild's would not be able to cover it. However, Jesus invested a lot more than a pound in humanity.

Example 2: Selling Manhattan Island

1Clear Memory
25050Present Value
366Interest Rate
4411411Years Invested
6Future Value
71.258 × 10 Power 12Answer

Suppose the Native Americans sold Manhattan Island in 1600 for $50.00, and invested that at a bank offering 6 % compounded interest. How much money would there be in the account in 2010?

Of course such a scenario would never have occurred as, sadly, they would never have been given the opportunity to invest, let alone walk into a bank. What little they had would have been stolen or taken by force from them.

Example 3: When I win the Premium Bonds

1Clear Memory
210000001000000Present Value
344Interest Rate
433Years Invested
6Future Value

Although very unlikely, assume I have just won the first prize in the British Premium Bonds, which is £1,000000. I decide to keep this in a building society offering a modest 4 % compound interest after tax, how much interest could I expect to earn in three years?

The money would earn £124,864 which is around £41,621 for each year invested.

£41,621 is still a lot of money depending where you live. In India, it could pay for over 1000 cataract operations for the blind and disabled. In Hollywood, it would just about cover a superstar’s lunch.

Compute Other Unknowns

The beauty of this old BA-35 is that it can transpose for any of the variables, thereby calculating backwards to give you the original values.

If you feed in all the values you have and tell it to compute the one value that you do not have, it will transpose for you and find that value. Use the same steps as before, but only change the last two when you tell it to compute.

Once you get the hang of this, it becomes second nature and the BA-35 becomes your friend. When I last saw my bank manager I took this with me, and when I started correcting him on his figures, he was very impressed.

All growth has a limit, the limit exists because any kind of growth depends on raw materials or resources to sustain it, and exponential growth reaches its limit very quickly because it consumes resources very quickly.

This Article Continues...

Warren Buffett
BA-35 Solar Business Analyst
Compound Interest
High Earners
Social Compliance
Buffett-O-Meter: Watch your money grow by-the-second
Some Warren's Tips