Question: Would you rather have a million dollars
now or take a penny now and double the amount for 30
days? compund interest
As expected, 90% of people chose the million dollars now option. I
would have made this choice myself a few years ago. But this would
have been the poorer choice, because you would have shortchanged
yourself by over $4 Million at month-end. Don’t believe me? Look at
penny table calculation on the right. The simple act of doubling
your previous day’s investment can rapidly reap huge rewards thanks to the powerful
concept known as
compounding .
Now a 100% return every day is highly unlikely, but the principle
of compounding holds true for even smaller returns (though it will
take longer than a month to make your fortune). This is why
compounding is a core aspect of
good personal finance and the reason why the rich get richer.
As outlined in a
Kiplinger , when you're young, you have an asset money
can't buy: TIME. Start saving now and turn pocket change into
riches. Compound interest has been called the eighth wonder of the
world. And with good reason. It magically turns a little bit of
money, invested wisely, into a whole lot of cash. Even Albert
Einstein is said to have called it one of the greatest mathematical
concepts of our time.
Here's the gist which you can clearly see in the penny
table: 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.
To make compounding work for you follow these three
basic principles:
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.
Related:
~
5 Steps to Take Now in Preparation for Double Digit Inflation
~
10 ways to Quickly Improve Cash Flow by Creating Passive Investment
Income
~
The "Must Have" Second Career For Everyone
About the Author: Working in corporate
America, Andy shares his thoughts on working life, money management
and related topics. You can see more articles like this at his
personal finance and investing blog : www.savingtoinvest.com
User post: The power of compounding
user
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From the Community…
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Posted by Mon Sep 14, 2009 6:41am PDT
Report Abusemuch as possible, i'm avoiding conflicts with anybody esp, to those i considered dear to my heart, bc i'm not the easy come easy go type....i'm holding my temper but to no avail...i'm trying to be careful with my words, bc when they are spoken u cant rephrase them anymore...i'm just human...i might be a simple woman, but i can be extraordinary when i am asked.. i might seem to be weak, but to some extent i'm also tough..i'm taking full responsibility of whatever things i told you but i think u might be needing some shaking as well...sometimes things teach us some lessons....whether we want to pick up those lessons or not, it's up to us.....
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Posted by Mon Sep 14, 2009 8:22am PDT
Report Abusei would love to see where "amy" is getting that 10% return rate
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Posted by Mon Sep 14, 2009 11:38am PDT
Report AbuseAngelaB - 10 was not so hard a few years ago. I agree now 10% is very difficult, but the point I was trying to make holds - compunding is very powerful and the earlier you start the better.
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Posted by Thu Sep 17, 2009 3:18pm PDT
Report AbuseGetting 10 percent is easy. You can get 10 percent from a house. You get 4 percent from appreciation and 6 percent from rent which totals 10 percent. A cool fact is that you can turn $2000 into a million dollars in 63 years at 10 percent.
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