I Love Compounding

I've talked before about the power of compound interest and the power of time (which are closely related -- time is what makes compounding so powerful) and how they can make you rich rather easily (simply save, invest, and repeat for many years.) And while this next piece is really nothing new, Kiplinger's does remind us how great compounding is. Their thoughts:

Here's the gist: When you save or invest, your money earns interest, or appreciates. The next year, you earn interest on your original money and the interest from the first year. In the third year, you earn interest on your original money and the interest from the first two years. And so on. It's like a snowball -- roll it down a snowy hill and it'll build on itself to get bigger and bigger. Before you know it ... avalanche!

They then give three tips to making the most of compounding:

1. Start young.
2. Remember that a little goes a long way.
3. Leave it alone.

I've been doing this for about 15 years now and the amount I earn each year from compounding is really starting to take off. My magical date: when I earn more from the growth and compounding of my investments than I do at my job. That will be a glorious day. And while it's still a bit off, it's not so far away that I can't see it coming. I'm so excited!!!!

Did I mention that I LOVE compounding? ;-)

Comments

[BeyondtheConsumer]

Math is fun when it equals real dollars!

[Coach]

I love compounding as well. Many people don't understand the power of it. I personally believe that nothing beyond your Religion and Spirit is bigger than compounding interest and residual income. If there is, I have not found it as of yet. lol. If you had invested $200.00 per month in the S&P 500 index in the beginning of 1976, with no withdrawals made, it would have grown to $18,275 five years later. After 10 years, the investment would have grown to $55,956, which more than half of your earnings would have been from compound earnings and market growth. After 30 years, at the end of 2005, the investment would have grown to a whopping $686,738 which most of the value would have come from compound earnings and market growth, no the money invested. Actually, you would have invested approx. 10% of the 686K. I have been in the compounding game for a long time and that's why I love it so much. People who have not taken advantage of it can't see it's power.

[Joe]

Where are you putting your money to compound? In a bank it does this, but it doesn't in the stock market. You buy a share with your money and the value may raise, but it doesn't have a portion added to it which will increase the money you make off interest. Or...correct me if I'm wrong...

[JGInvest26]

Well, dividends from the stocks that you own may act like compounding interest when they are reinvested.

[Jake]

Joe - the market does compound year over year. It just isn't so obvious as interest earned from the bank. For example, if you bought a share of Apple at $50 bucks and held onto it for 5 years and they're now worth $100, that is a 100% return on investment. However, if you convert that to compound interest, it comes out to 14.87% compounded annually for 5 years. In essence, the stock market has history compounded 8% annual returns which are big returns compared to any other type of security. I hope I made sense.

[Clint Johnson]

Exactly Right. Time is the key. I am trying to convince every 20 year old I know that they need to be saving now. The more you save in your 20s, the less you will need to save later.

[Big Cheese]

Compounding = good. Inflation = bad.

Ugh.

[Ryan]

Albert Einstein described compound growth as "the greatest mathematical discovery of all time" and considered it the eighth wonder of the world.