The Magic of Compounding Interest is rewarded to the patient, disciplined investors. Take the above chart from benzinga.com that shows when an individual invests $5,000 per year for 10 years, and then stops altogether. So adding $5000 from ages 25 – 35 and then no more money, then leaving it invested until age 65 has a total of $787,176. Whereas the 55 year old who adds $5,000 over 10 years (from 55-65) only has $83,227. Both of them contributed a total of $50,000. The 25 year old has $727,176 in investment earnings and the 55 year old has $33,227.
The way compounding works is as follows: take $10,000 and assume a 10% rate of return. After year 1 your money is worth $11,000. If you leave your $11,000 invested and earn the same 10% return, after year 2 your money is worth 12,100. So in year 1 your investment earnings were $1,000 but in year 2 they were $1,100. Your initial earnings after year 1 were added to your total money and those initial earnings made their own interest in year 2. This pattern continues on where your investment earnings are earning interest. This is extremely powerful over the very long term horizon. After 40 years, the initial $10,000 you invested will be worth $452,593 (before taxes and inflation). This is without adding any more money. But what if you added $10,000 annually for 40 years? This amount would be worth $4,878,518. And you would have only contributed $410,000. So over $4.4 million of your money is from compounded interest.
My goal is to help those understand the importance of investing and saving. We work hard for our wealth, making sure you properly invest and have your wealth working for you is key to achieving financial freedom.