Power Of Compounding… Shazaam!
One Million dollars now or one Penny today, but doubling it in the next 29 days?
90% of people will probably choose the One Million Dollar payout. But if you look at the chart to the right, you’ll see by the end of 29 days (counting day one at penny one), the penny option ended up over 5 million dollars! Of course, doubling your account daily is next to impossible, but the power of compounding would work even at a modest return of 1% per month or more. And if you stop and think about it, the real question is not how much return but for how long.
Here’s what a leading financial publication has to say about compounding and investment:
1. The sooner you start, the better. Compounding is a function of the return you get and time. For most people a 3 to 7 percent is realistic, but time is a diminishing commodity. So the younger you are, the more time you have to really make compounding work for you, and the wealthier you can become. The next best thing to starting early is starting now. Consider this example: Amy, a 22-year-old university graduate, saves $300 per month into an account earning 10% per year for 6 years. Then at age 28, she starts a family and decides to stay home with the children full time. By then, Amy had kicked in $21,600 of her own money. But even if she doesn’t contribute another cent ever, her money would grow to a million bucks by the time she turned 65
2. Make regular investments – especially via a tax advantaged 401K or IRA plan or in a good high yield savings account for your post-tax savings. Remain disciplined, and make saving a priority. The more you save, the more you can let compounding work its magic. Even a little bit goes a long way, and you can start with as little as $20 a month.
3. Be patient. Compounding only works if you allow your investment (capital) to grow. It takes time to see the wonders of compounding returns, and as you can see in the penny table the most growth comes at the very end. Compounding creates a snowball of money and you will get rich if you start young, invest wisely and leave your money alone over the long term.
It doesn’t take a genius to take advantage of the power of compounding, but it does take planning, and of course, the sooner you start on this journey, the bigger your final payout will be…