Ideas for Money Wisdom #14

💡 The curvature principle says that sometimes a curve is better than a straight line.

If we want to "round" our money upward, we use "interest."

The meaning of "interest" is the profit (or compensation) we get when we let someone else use our money.

In other words, I brought 10 ₪ to the bank.
The bank gave me 1 ₪ interest on it.
When I get the money back from the bank, I'll get 11 ₪ instead of the 10 ₪ I brought in the first place.
What that means is that I got an extra 1 ₪ (profit/compensation) because I let the bank make use of my money.

Savings with compound interest grow exactly like that,
not in a straight line with the same addition every time,
but along a curve that keeps bending upward.

This happens because the interest/addition/profit/compensation we got at first gets added to the money, and then both together get an additional bit of interest.

So what's the difference between saving 10 ₪ every week without interest, and saving the same amount with interest that accrues interest?

When we save 10 ₪ and put it in our savings jar - it stays 10 ₪.
Even if every week we add our pocket money and there's another 10 ₪ and another 10 ₪ there.
In total, after 3 weeks we'll have only 30 ₪.

Whereas if we put the money into savings with interest: 
In the first week there will be 10 ₪ there.
In the second week there will be 10 ₪ + the first interest (say 1 ₪) + 10 ₪ new.
In the third week there will be 10 ₪ + the first interest (say 1 ₪) + 10 ₪ + the second interest (1.5 ₪) + 10 ₪ new.
That means in total we'll have 11 ₪ + 11.5 ₪ + 10 ₪ = 32.5 ₪ there.

What this means is that our money "made money." 
The interest grew our money every week. 
So instead of having only 30 ₪ 
we have 32.5 ₪ 
over the same period of time.
 
Compound interest = money that multiplies itself 📈

Interest is usually yearly rather than weekly like in the example, but the more time passes, when our savings have a higher interest rate (meaning the bank gives us more money for letting them keep using ours), the more money we save, the more time goes by.

So, the earlier we start saving, the more time the curve has to "round" upward.

And the more we get to earn from compound interest (just like in the savings account for every child).