I have heard people refer to it as “The magic of compounding.” Personally, I don’t like the term “magic.” Magic implies something mystical, beyond our comprehension. Rather than “magic,” compounding is just math – incredibly powerful math – but it is just math.
Compounding means that there is growth on the growth. For example, an investment of $100 that appreciates 7 percent will be worth $107 at the end of the first year. If the investment grows 7% percent again in the second year, the return would be 7 percent on $107 or $7.49.
7% growth on $100.00 = $107.00
7% growth on $107.00 = $114.49
In year two, the dollar amount increase exceeds that in year one. You have a 7% return on the original $100 and a 7% return on the $7 you earned in year one. Each year, you earn a return on the original amount ($100) and a return on the growth that occurred every year prior. Being a disciplined saver and adding to the account every year amplifies the impact of compounding.
When it comes to investing, time is your friend – especially if you are new to the workforce. The longer you allow your money to grow, the better. When it comes to saving for the future, you need to be consistent and disciplined. Put money away every year, don’t touch it, and let it grow.
