Compounding – An Introduction to Your Life Long Financial Friend

It’s nice to have a friend - and in the world of personal finance, compounding is your lifelong friend.

Compounding is when your money grows upon itself – when your money works for you.

Here is a simple example:

You invest $1,000 and it earns 5% per year:

• In the first year, you would earn $50. 

• In year two, you would have $1,050 invested ($1,000 + $50 year 1 interest) and you would earn $52.50.

• In year three, you would have $1,102,50 invested ($1,000 + $50 + 52.50) and you would earn $55.12 and have a total of $1,157.62

It is that simple.  When your life long financial friend Compounding work for you, your money continues to grow for you.

Here is another example.  Let’s say you can save $25 per week (that is about $3.57 per day) for 10 years with a 5% return, you would have over $17,100.  Just for saving $25 per week.  If you can do that for 20 years you would have over $45,000.

There are three components to compounding:

Amount:  the amount you invest.  The more you invest, the more it can grow.

Term:  the lengths of time you invest.  The longer you invest, the more it can grow.

Return:  what percentage your money grows per year.  The higher the percentage, the more your money will grow.  This is dependent on what you invest your money in.  We have a learning videos and blogs on this topic.

In the next few blog posts, we will explore the impact of term (lengths of time) and return will have on your savings and types of returns you can anticipate for different investing options.