I know you’ve probably been taught that there’s only 7 Wonders of the World, but I agree with Albert Einstein – there’s another one – one that although it’s equally impactful, it’s not well-known.
If you haven’t been introduced to this phenomenon, let me present it to you: “Compound Interest”.
Compounding interest is when your money earns interest and then that interest also earns more interest!
To explain the power of compounding, let’s play a game of golf. Let’s also place a friendly wager of 10-cents on the first hole with the bet doubling on each hole. How does that sound? Since there’s only 18 holes it can’t be that bad….can it??
Here are the results for the first half of the game:
Hole 1 10 cents
Hole 2 20 cents
Hole 3 40 cents
Hole 4 80 cents
Hole 5 $1.60
Hole 6 $3.20
Hole 7 $6.40
Hole 8 $12.80
Hole 9 $25.60
At the halfway point, the bet is now $25.60… and we started out with just 10 cents! Let’s continue playing:
Hole 10 $51.20
Hole 11 $102.40
Hole 12 $204.80
Hole 13 $409.60
Hole 14 $819.20
Hole 15 $1,638
Hole 16 $3,276
Hole 17 $6,553
Hole 18 $13,107
As you can see on the final hole the total is $13,107!
What does this mean?
Well, when given enough time the power of compounding can turn very small amounts of money into huge sums.
But it’s important to remember that initially, the money grows very slowly; however, the moment it reaches a certain point the growth becomes exponential! That means be patient with your investment. If you stick it out, it will grow and make you millions!
Another important point to drive home is that the earlier you start, the more money you will accumulate – even with a smaller initial investment! To illustrate this, I’m going to use a graphic from Dave Ramsey’s Financial Peace University.
This shows two brothers: Ben & Arthur. As you can see, Ben started investing $2,000 a year from ages 19-26 and then stopped. With an average rate of return of 12%, by the time he’s 65 years old, he accumulated $2,288,996!
On the other hand, his brother Arthur, waited and decided to invest when he was 27-years-old. He decided to invest the same amount except he did it from ages 27-65. With the same average rate of return (12%) he accumulated ‘only’ $1,532,166.
Ben – who started earlier and only invested $16,000 ended up with more money than his brother who invested a total of $76,000!!
If you’re past the age of 25, don’t despair – you still have time… just don’t let another year go by without taking advantage of this phenomenal concept.
Invest NOW! Then have patience to wait and the power of compounding will work for you and it can reward you with millions.
If you have children please teach this to them and help them shape their future!