 |
Compounding
"What do you consider the greatest invention of all
time?" - Reporter
"Compound interest." - Albert Einstein
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
|
|
|
