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Power of Compounding Explained With Examples

The power of compounding in finances is often being ignored by people, one have to understand the incredible benefits of compounding by starting early. For those who start early and continue their investments for long tenure, with the help of compounding they can comfortably retire rich or reach their long term goals with ease. Power of compounding helps you in setting up huge corpus if you are disciplined to invest for long tenure.

To explain the importance of financial planning I would like to come up with some 2 cases for understanding the power of compounding.

Power of Compounding Examples

Early Investors vs Late Investors

Phill & Mike are friends who have started their job at the age of 21 with a salary of $ 2500 per month, right after joining the company Phill have started investing $ 300 per month at 10% interest per annul which is compounded quarterly till the age of 45 and have decided not to touch that money till he turns 60 and use that corpus for his post retirement expenses, whereas Mike have started using all his earnings for buying luxuries like expensive mobile phone, cars, fashion accessories, etc. and later at the age of 30 both got married soon or later with the increased expenses Mike though of investing money at the age of 31 (note the 10 year difference here) and have invested $ 300 per month till the age of 55.

Now at the age of 60 assuming that both of these friends have never touched their money Phill gets an amount of $ 1562439 whereas Mike got $ 581900. Both of these friends have invested $ 300 per month for a period of 24 years and have later invested the maturity amount in fixed deposits which earns 10% interest per annul but the final amount which they have received at their retirement have a difference of 1 crore (approximately).

Key Lessons We Should Learn Here:

  • For better results always start investing at young age, the day you ignore today could make you repent in future (which applies not only for personal finances but for every valid case).
  • Increase the amount you could invest with your earnings for much better results.
  • The principal money invested by both of these friends is same but if you notice the returns Phill is on safer side with almost 1 crore rupees high in corpus

Read: Risk vs Reward: How Should You Invest Your Money?

Guys this is the power of compounding which can do wonders if you follow the discipline of investing and on a closing note do you know that the great investor Mr. Warren Buffet have made 99% of his wealth after his 50th birthday.

About Janusz
Janusz K. is an experienced copyrighter, see LinkedIn profile for more details.

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