Today let's look at the power of compounding growth, which Einstein mentioned is:
The 8th wonder of the world
Before we do though you should learn more about the investing basics here.
What is compound growth?
Compound growth really is one of you biggest allies or enemies in helping you achieve your money glee. Compound growth is the closest thing to magic in the financial world you will come across.
What this basically means is it's possible to make money from the money you have already gained. The same can be true for your losses though, the more money you lose, the more the loss continues to grow.
Enough talk, let's get to an example.
Imagine that you have $10,000, which hypothetically returns 10% in it's first year. This $10,000 in 1 year would be worth $11,000. If we fast-forward this over 10 years here's what it will look like:
Year Starting Year Amount End Year Amount Total Growth
1 $10,000 $11,000 $1,000
2 $11,000 $12,100 $2,100 ($1,100)
3 $12,100 $13,310 $3,310 ($1,210)
4 $13,310 $14,641 $4,641 ($1,311)
5 $14,641 $16,105 $6,105 ($1,464)
6 $16,105 $17,715 $7,715 ($1,610)
7 $17,715 $19,487 $9,487 ($1,772)
8 $19,487 $21,435 $11,435 ($1,948)
9 $21,435 $23,579 $13,579 ($2,144)
10 $23,579 $25,937 $15,937 ($2,358)
While of course there are some assumptions of consistent growth at 10% per annum, which is unlikely to be smooth and this example does not take into account your personal needs and / or objectives, take a look at the growth after 10 years. This is over 2 and a half times what you could have been earning in the first year.
Compounding sounds great but why should you care?
- You either understand and use compounding growth for or it is likely to go against you
- It can help you to achieve your money values quicker
- The concept of compounding can be used in any part of your life
Now that you understand the basics of how this tool works, how do you feel this can help you in your life?
What examples in investing, health or life have you used this concept?
What other topics would you like to have answered?
Remember to live your money glee!