It’s easy to get busy or get caught up in all that’s going on today and forget about a basic tool that has worked since forever — compounding! Fortunes have been built with this simple concept, but it does take time and patience because it doesn’t happen overnight.
Here is a story to illustrate how the concept of compounding works:
This is a story about two students – Susan and Jason. At age 18 Susan invested $2,000 and she invested another $2,000 each year for three more years for a total of $8,000. Jason on the other hand, didn’t start investing until age 30 and he invested $2,000 each year for the next 35 years for a total of $70,000. Here is my question to you, “If they each earned 10% annually, at age 65, who has the most money?”
Almost without exception, people choses Jason. But the real answer is Susan and it is due to the power of compounding. (Check out the chart below to see a year by year account.) Basically, compounding is when your interest earns interest and the longer that has to work, the more your money grows. So even though Susan invested less she had more time for the power of compounding to work.
Click here to see the details of Susan and Jason’s investments
The moral of the story: Start investing as early as possible, even if you only have a small amount. For all those people who say “I will start investing when I pay off my bills or when I get a raise,” I point them to the story of Susan and Jason. Simply put, waiting costs you money.
P.S. – It’s rumored that Albert Einstein said that compounding was the 8th wonder of the world. If this impressed Einstein, it’s probably a concept worth keeping top of mind when it comes to saving and investing. Check for yourself. Here is a link to the Compound Savings Calculator on Bankrate.com or use the Squeeze Simple Savings Calculator. See how your money can grow. ps!