Why Compound Interest Is Just a Treat That Keeps Growing

Compound interest is often described as the eighth wonder of the world. At Whisker Wealth Management we prefer to describe it as the first wonder of the kitchen. Allow us to explain, in a way that is not financial advice and not accurate.

The basic idea

Imagine you have one treat. You do not eat it. You put it in a small drawer. The next day, by a miracle of the system, you find a second treat in the drawer. You do not eat that either. The following day, there are three treats. This is compound interest, or, as the kitchen calls it, a mistake.

Simple interest versus compound interest

Simple interest gives you a fixed number of treats each day. Compound interest gives you a number of treats that depends on how many treats you already have. The more treats in the drawer, the more treats appear. The drawer becomes a sort of treat engine.

In practice the second system works best if you leave it alone, which is the strategy of every cat in history. We have therefore been compounding for years without noticing.

An example

Suppose you deposit one tin of tuna on the first of the month. The firm will pay interest at the rate of one small flake per day. After thirty days, you will have a tin of tuna and thirty flakes. After a year, you will have a tin and three hundred sixty five flakes, which is another tin. This is why we say time is on your side.

Common mistakes

• Taking out your treats early, which we call a withdrawal and which the firm regards as a betrayal
• Asking the firm where the treats are kept
• Sitting in the drawer
• Letting the dog look at the drawer

What the firm recommends

We recommend that clients start early, deposit regularly, and think of the long term. We also recommend sleeping on any major decision, which has an excellent record. The longer you sleep, the more interest you earn, and the less you worry about where the interest comes from.

Please remember that we are cats, that this is satire, and that you should speak to a qualified human adviser about your actual money. The drawer in our office is not real. Do not put real tuna in it. Penny has already tried.