The Miracle Of Compounding

By: Eva Sadej

Blueleaf’s position: start saving and investing as soon as you can so you can benefit from the miracle of compounding. You can put aside less cash and still earn more money as long as you start early.

Many people have described compound interest as the eighth wonder of the world.[1] We agree. Institutions and endowments such as universities have a great advantage over individuals because their time frame is limitless. Younger people have a significant advantage over older people because they have more time to let their money grow exponentially. The longer your time frame is, the higher your return expectations are. The reason is the simple mathematics of compounding; even if you’ve never liked – or even understood –math before, the miracle of compound interest will make you fall in love.

Imagine that at age 22, fresh out of college, you begin saving $300 a month and investing the sum in a series of corporate bonds with an average annualized return of 6%. Because both your principal and the interest earned each year is compounded annually, by age 65 you will have nearly $715,000 while the sum of your contributions had only totaled $154,000. You will have multiplied your money by five times and secured three-quarters of a million dollars just by starting early and being diligent about contributing a relatively modest amount on a regular basis.

Now imagine you began the same savings plan at age 32. After saving $300 a month and investing similarly, by age 65 you will have only $371,000, having contributed $119,000. You will have tripled your money, which is still quite excellent. However, note that you will have missed out on enormous gains and an additional $344,000 for your nest egg. What if you began at age 33, would it be much different that if you began at 32? The answer is yes. You will have missed out on $24,000 for your retirement account. You can do these calculations here: https://www.moneychimp.com/calculator/compound_interest_calculator.htm

With a steady job and early, disciplined investment, a nest egg of a few million dollars is entirely within reach. Let the miracle of compounding help you. You’ll have significantly more in your bank account at retirement, having contributed significantly less. Smaller sacrifices now result in a much fuller retirement later.

[1] https://www.kiplinger.com/columns/starting/archive/2007/st1107.htm

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