Albert Einstein
“Compound interest is the most powerful force in the universe.”
As mentioned in my previous blog, one’s savings rate really matters in investing and growing money over the long term. Ideally you can start to invest early, with meaningful amounts. That is because compounding is such a powerful force. Many people don’t understand compounding, so here is how I would explain it:
Take the U.S. stock market, which has brought its investors an average of 10 percent a year over the past 100 years (give or take a little). If you started with a $200 investment, your account was worth $220 at the end of the first year (the original $200 plus the $20 you earned). When you leave the $20 earned in the first year reinvested, you start year two with $220 and earn $22, leaving your stash at the end of the second year at $242. In year three, you earn $24.20 and your account is now worth $266.20. And so on … You can see how the base upon which you earn your return continues to grow, for your benefit. That makes compounding so special.
Benjamin Franklin stated the benefits of compounding as follows: “Money makes money. And the money that money makes, makes money.” When Franklin died in 1790, he left $5,000 to go to his two favorite cities: Boston and Philadelphia.
He indicated that the money must be invested and could be paid out the first 100 years and the second 100 years after the gift was made. After the first 100 years, each city could withdraw $500,000 for public works projects. After 200 years, in 1991, they received the balance compounding to approximately $20 million for each city.
You can accumulate much more money by starting as early as possible and taking advantage of compounding's marvels!
