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Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#30 - Power of Compounding


Power of Compounding

You know it will be a good post when the image is just a chart of numbers. For this email, I wanted to highlight the power of compounding. The chart shows the difference in the accumulated balance depending on the age the investor starts investing. In every scenario, a 7% annual fixed rate of return is assumed. Also, in every scenario the same $12,000 a year is saved. At age 70, the balances look drastically different depending on when the investor began saving. Compare with me the balance difference of one who starts saving at age 25 and one who begins at age 35. There is just a 10 year difference and, therefore, $120,000 difference in total savings. The actual account balance difference though, is over $1.7 million. The 25-year-old more than doubles his account balance at age 70 by starting to save just 10 years earlier. This chart can be viewed from a positive and negative perspective. It is hard to not say “if only I started earlier." This does little to help though. Look forward not backward. Another quick thought before I go- The natural tendency is to say the 25-year-old “won” in this example. Asset accumulation should rarely, if ever, be the end goal. There are plenty of great reasons why one would not invest money and use it for other purposes. Knowing the impact of compounding can assist in that decision making process.

 

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Thank you for reading! Have you seen illustrations showing compounding before? What is the best illustration you have seen?


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