Investing and the Magic of Compounding

Compounding is the most important thing to understand to have your money working for you, rather than be a wage slave.

Compounding is where the money you make then makes more money, and that money then makes more money i.e. money for nothing!  This does not sound exciting and yet it is a force that over time that can create the most magical wealth. If only we were taught this at school!  Einstein described compounding as ‘the eighth wonder of the world’, and he was right!  When we have compounding working for us (by investing) it is a force that can create the most incredible wealth.  It is an asset. When it is working against us the interest on consumer debt) then it drains wealth away from us and is a liability.

Check it out with this natty little compound interest calculator

Take 1

Choose your currency

Pop in £1000 as an initial lump sum

Put £0 for the amount you will add every year

Choose 20 years as a time frame

Choose an interest rate of 6% (the average rate of return from investing in the stock market is 6-8%)

Your interest is paid 1 times a year

At the end of that time you have done nothing and your £1000 is now £3207!

Take 2

Increase the time frame to 40 years. This gives you nice tidy sum of £10,285!

Take 3

You are now going to add £1200 a year to the pot. Everything else stays the same.  After 20 years you have £49,998!  After 40 years you have £207,142!!  This is a profit of £158,000!!!

(the total amount minus the money you put in over 40 years)

THIS is power of compounding and why you want it working for you!

Image courtesy of Yeshi Kangran

Disclaimer:  Simple Successful Stocks are not financial advisors and the content of this article is for financial education only.  Please read our disclaimer here.

 

 

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