Confounding compounding

Waiting is a painful thing to do. Agreed?

If you've saved money in your savings account, you'd know that especially in the past years, it doesn't do much, what's worse is waiting for money to grow in your bank account is quite a counterproductive thing to do.

How then, do we get out of this puzzle of wanting to make our money grow without taking too much risk, especially when you're at the starting line, until you get more comfortable?

The answer isn't that complicated, and you don't need Warren Buffett, the greatest investor to tell you how.

However I will share with you how this little magic helped him. It helped him a lot.

If you're new to finance and investing, you might not have heard of the term compounding effect that much. If you're not a beginner in this field, then perhaps you'll be intrigued by just to what degree the impact of compounding can have.

Start from $1,000.

Imagine you have a magic money tree that grows not just apples, but new money trees. That's the power of compounding in investments. Here's how it works with your $1000 and a 10% average return (remember, actual returns can vary):

Year 1: You plant your $1000 tree, and it earns 10% interest, growing to $1,100.

Year 2: Now you have $1,100, not just $1000. This year, it grows by 10% of the bigger amount, giving you $1,210. The magic? That extra $10 interest comes not just from your original $1000, but also from the $100 you earned last year. Basically interest on top of interest.

Year 3: This time, you start with $1,210, so your 10% return becomes $133.10. That means your tree has grown to $1,343.10! The more years you let it grow, the faster it compounds, like a snowball rolling downhill.

In summary, this is how it grew:

It's a lot of waiting? Not quite.

I know $1000 sounds like a small amount to some, but imagine if you invested $10,000, by the same calculations, you'd get a cool $42,509.10 by the end of your 10th year. I know 10 years sounds long, but in the grand scheme of things, it's not. And remember, that's without regular investment contribution into the account i.e. you only put in a one-time contribution and let it grow.

Although the in actual scenario could be lower than 10% in economic downturns but can also be higher too. The best part of the compounding effect is there's no hard work on your part.

It's just your money that is working hard for you.

Hope that's inspiring, and helps you, one step at a time! Till my next post!