A tale of compounding

If there is one thing I wish I had have learned earlier, it’s that you should start investing from the youngest age possible, to let the power of compounding work its magic.

Not only do you receive the benefit of compounding, but you receive the benefit of experience, which is potentially even more valuable.

People often start investing too late and then are worried about market volatility, or ‘don’t understand how it all works’.

The volatility is easier to wear when you are young and your expenses are low, before the mortgage and school fees kick in.

As the famous saying goes “it’s time in the market, not timing the market that really counts”.

One of the reasons investing regularly over the long-term is so successful at building wealth, is because of the power of compounding.

In the financial world, there is a story about compounding that is always doing the rounds.

It’s about two friends who start investing at different ages.

Bob starts investing $5,000 a year from the age of 20, but stops investing once he turns 30.

Alternatively, Bruce starts investing $5,000 a year from age 30, and invests this amount for the rest of his life.

Who ends up with the most?

In a display of the power of compounding, it’s the person that started investing earliest in life.

	Bob	Bruce
Investment value at age 30	$78,227	$5,000
Investment value at age 40	$168,887	$83,227
Investment value at age 50	$364,615	$252,115
Investment value at age 60	$787,176	$616,729
Investment value at age 70	$1,699,454	$1,403,905

This truly illustrates the benefits of investing from a younger age, as the sooner you start, the more time the power of compounding has to work its magic.

In an interesting takeaway, Bob only invested $50,000 over a ten year period. Alternatively, Bruce by the age of 60, has invested $150,000, and never catches up to the value of Bob’s portfolio.

Understanding and utilising compounding is a fundamental financial planning principle, so use it to your advantage.

Start investing as early as possible. Invest regularly over the long-term. It’s that simple.