Monday, March 29, 2010

Compounding, The Most Powerful Force In The Universe

We get bombarded with advice on how important it is to begin investing when you are young. To truely apprciate the awsome power of compounding we will go through this eye opening example.

The first person A starts saving $5,000 (like you should be in your TSFA) at age 21, and stops saving after his last contribution at age 30 (you shouldn't stop). making 10 x $5,000 investments in total.

The second person B does not invest anything until age 30 however he invests $5,000 a year from age 30 until age 64.  making 34 x $5,000 investments in total.

Now both have turned 65 and want to start living off their savings. who do you think has a bigger nest egg. person A who hasn't saved a dime in 34 years, or person B, who started saving a bit late, but has worked hard and put lots of money away.

well, take a look at the spread sheet using a 7% intrest rate:

At age 64 Person B has not yet caught up with person A.

so is starting early important? yes
I would go so far as to say compounding is one the most fundemental wealth building tool.
The most powerful force in the universe.

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