Compounding
Many novice investors have a hard time grasping the concept of compounded earnings. So think of it this way: You know that $500 you charged on your credit card a few years ago and never paid off? Funny how that balance has grown to over $3,500 even though you pay the minimum each month and have sworn off any further purchases.
That’s how investing works, only you could’ve earned that $3,500 if you had invested the money instead of spending it on clothes and a new CD player.
Generation X versus The Baby Boomer
The most important aspect of compounding is to start early. The younger you start, the more you’ll earn. See how this works in the table below, where one investor who starts younger but invests less money over less time actually ends up earning more.
| Generation X | Baby Boomer | ||
| Age | Contribution | Age | Contribution |
| 25 | $2,000 | 25 | None |
| 26 | $2,000 | 26 | None |
| 27 | $2,000 | 27 | None |
| 28 | $2,000 | 28 | None |
| 29 | $2,000 | 29 | None |
| 30 | $2,000 | 30 | None |
| 31 | $2,000 | 31 | None |
| 32 | $2,000 | 32 | None |
| 33 | $2,000 | 33 | None |
| 34 | $2,000 | 34 | None |
| 35 | 35 | $2,000 | |
| 36 | 36 | $2,000 | |
| 37 | 37 | $2,000 | |
| 38 | 38 | $2,000 | |
| 39 | 39 | $2,000 | |
| 40 | 40 | $2,000 | |
| 41 | 41 | $2,000 | |
| 42 | 42 | $2,000 | |
| 43 | 43 | $2,000 | |
| 44 | 44 | $2,000 | |
| 45 | 45 | $2,000 | |
| 46 | 46 | $2,000 | |
| 47 | 47 | $2,000 | |
| 48 | 48 | $2,000 | |
| 49 | 49 | $2,000 | |
| 50 | 50 | $2,000 | |
| 51 | 51 | $2,000 | |
| 52 | 52 | $2,000 | |
| 53 | 53 | $2,000 | |
| 54 | 54 | $2,000 | |
| Total Contribution |
$20,000 | Total Contribution |
$40,000 |
| Total Earnings at 8% |
$135,042 | Total Earnings at 8% |
$91,524 |
- Inflation
- Compounding
- Dollar Cost Averaging