How Compounding Can Make You Really Rich. Really.

Oink oink, Piggies!

“Compounding.”  Enough to make your eyes glaze over, right?  Wrong.

Compounding is magic.  It’s really one of the most magical things in the world.  Most people hear “compounding” or “compound interest” and start zoning out, but hear me out…“compounding” is your ticket to get rich.

Now I already hear those of you out there thinking “Yeah, yeah, yeah. I’m gonna get rich with the 0.1% or so that my savings account is going to pull in?!? Ha!”  And you’re right.  Typical savings accounts in banks suck.  0.1% isn’t going to get you very far fast.  But it generally isn’t hard to average far more than that in things like index funds, which can pull in 6-9% on average over many years.

So, what kind of money are we talking about?

Big money.  Let’s take an example.  Let’s say you save $100 each month (you should be saving much more than that, but this is just an example).  That’s $1200 per year.  Then, you put that into an index fund that tracks the S&P500 and gets a 7% real rate of return (that means that we’re factoring in inflation).  Super.  And let’s say you do that from the time you’re 20 until the time you’re 70.  Awesome.  How much money do you think you’ll have?

Check this out.

 

Yup.  We’re talking $523,000.  Compared with only $61,000 with no interest.  Interest is important.

Got your attention, eh?  That’s the magic of compounding.  …And this is only $100 per month with a 7% real interest rate.  What if you upped the savings to $150 per month or $200?  $300?  More?

Time is important.  Really important.

Time and interest are key to make compounding work.  Without time, compounding can’t work its magic.  Without interest, it can’t as well.  And the thing is, every little bit of time counts.  Let’s run the same numbers, but this time, you started saving 10 years later…from age 30 to 70 at the same 7% real interest rate.

If you started just 10 years later, you would only have just over $257,000 at age 70.  That’s about half the money than if you would have started 10 years earlier.  Wow.

Compounding isn’t so boring now, is it?

Oink oink, Piggies.

-Mr. Piggy Bank

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