"Compound interest is the eighth wonder of the world".
(Baron de Rothschild)
There is one trait which is almost universal among those who obtain and retain great wealth. It is appreciation of the awesome power of compounding investment returns. This is the basis of the colossal wealth of major banks, insurance and credit card companies. Anyone who develops this appreciation, especially at a young age, has an excellent chance for a prosperous future.
NOTE: Taxes are not included in any of the examples in this article. Nor is any information or advice on financial risks of any particular investments. To obtain such information, you are advised to see a licensed, qualified professional.
Let's look at an example to compare the results of investing small amounts of money early rather than investing larger amounts of money later.
Don invests $ 100 per month for nine years between the ages of 23 and 31. Don's total investment is $ 10,800. Bob invests $ 100 per month between the ages of 31 and 65. Bob's total investment is $ 42,000. The annual return in both cases is 8% compounded monthly. By age 65, Don has $ 236,800 while Bob has $ 229,400. Bob has less money even though he invested 26 years longer than Bob! Such is the awesome power of compounding over time. Now wonder Baron de Rothschild called it the "eighth wonder of the world".
No serious wealth builder can afford to ignore the power of compounding. Results appear unimpressive in the early years. There are always trinkets, expensive cars and luxuries to lure us from our plans. However, it is certainly worthwhile to persist. Compounding is like a daredevil ride in an amusement park. It starts out slow but extremely achieves lasting pace and never stops accelerating – if we give it a chance. The joys of financial freedom far surpass the fleeting pleasures of buying all the latest toys.
Some Ways To Make Compounding Work For You
* Start your investment plan immediately using whatever funds you can – even just $ 100. Procrastination is the main enemy of compounding.
* Be satisfied with reasonable going market rates of return. Chasing high returns means taking bigger risks with your money.
* Create a budget that allows you to save at least 10% of your take home pay for investment. Setting up an automatic bank or payroll deduction monthly, or according to your pay schedule, is an excellent way to do this.
* Take advantage of tax deferral plans such as the IRA (USA) or RRSP (Canada). Maximize your contributions each year. Make contributions early. Do not wait till just before the deadline.
* Pay down your home mortgage as soon as you can. Opt for an open mortgage with no prepayment penalties. In a typical 25 year mortgage, well over half your payments are interest. It's like buying two or more homes to get one! The sooner you retire your mortgage the less interest you pay. Mortgages are an example of compounding working against you.
* Eliminate credit card and other high interest debt as soon as you can. This is another example of compounding working against you.
* Begin investing early for your children, preferably at birth. Take advantage of tax deferral and deduction plans for education savings. The earlier you begin investing the more returns may compound.
* Teach your children the tremendous wealth producing power of compounding. Encourage them to start their retirement investment plan as soon as they start working.
Cheers to your prosperous future!