Compounding |
To help explain the concept of compounding, let's turn to Mother Nature for a quick lesson. A farmer can plant a single seed of wheat, care for it and from it create more than 100 seeds. If these 100 seeds were planted and properly cared for again, they would produce at least 10,000 more seeds of wheat. This is the same concept of compounding money, properly cared for over time, will grow and multiply.
The amount of money you can accumulate through compounding depends on two critical factors: time and the annual rate of return. Time is the most fundamental the longer you let your money work, the greater your chances are for long-term financial success. By putting your money into investments that achieve a higher rate of return, the less money you must set aside.
To illustrate the power of compounding, take a look at the following calculations (you can adjust the amount of the initial investment, the amount of the ongoing investment, the time period and annual rate of return):
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