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There are many roads to becoming wealthy, but one that David Malcolm calls "a secret hiding in plain sight" is taking advantage of compound interest on your savings and/or investments. David Malcolm is a San Diego entrepreneur and real estate executive who has handled sales, acquisitions, management, and loan renegotiations totaling more than $4 billion. With five decades of professional experience, he acknowledges the vital role compound interest has played in his financial success and offers insights to those less familiar with the concept.

David Malcolm, San Diego Executive, on Compounding
David Malcolm, San Diego Executive, on Compounding Your Way to Wealth Pixabay

On the website Investopedia, Jason Fernando explains it as "interest on interest" as well as on the original principal.

The real beauty of compound interest is that it is not linear – your money grows faster over time. The longer you let it sit, the faster and more impressively it grows. It is not unlike the gambling concept of "letting it ride," which means leaving your winnings on the table for the next bet. The winnings in this case are interest.

Malcolm uses the example of two young friends, Steve and George. Steve gets a great job right out of high school and opens an individual retirement account (IRA). He contributes $5,000 a year into his IRA for seven years but loses his job at 25 years old and never makes another contribution.

George finally gets a good job at age 25 (the same age at which that Steve lost his job) and opens an IRA. He contributes $5,000 a year for the next 40 years. Assuming both IRAs make 10% interest who has the most money at age 65?

Steve contributed a total of $35,000 (ages 21-25), while George contributed a total of

$200,000 (ages 25-64). At age 65, Steve has a total of $2,361,603 and at age 65, George has a total of $2,232,963. The key take-away, Malcolm emphasizes, is to start young.

Even better, Malcolm notes that had Steve and George established Roth IRAs, from which any withdrawals made after age 59 are tax free, they would have more than $2 million on which they would pay no taxes.

In an article on Forbes Advisor, Kate Ashford writes that Albert Einstein called compounding the eighth wonder of the world! She also points out that compounding can happen at different intervals – annually, semi-annually, monthly, daily or even continually. And that makes a difference because the more frequently compounding occurs, the faster the money grows.

Her bottom line is, "Successful compounding lets you use less of your own money to reach your goals."

This could change someone's life, according to Malcolm, if they understood it or had it explained to them. But he cites James Surowiecki who says that "the level of financial literacy in the United States is very low."

If it is a little late for you to jump on the compound train, Malcolm suggests you share this knowledge with your children. "They will thank you," he concludes.

About David Malcolm

David Malcolm of San Diego is an influential real estate professional, entrepreneur, and community leader with over five decades of work experience. Mr. Malcolm is an esteemed graduate of Harvard Business School's Presidents Program, a licensed real estate agent and broker, and a Certified Commercial Investment Member (CCIM). He has run and advised multiple public and private companies and held several municipal and statewide public offices.