The Miracle of Compunding

The greatest minds in the world have marveled over the simple and yet extraordinary concept the power of compounding. Einstein called it “the greatest mathematical discovery of all times” and the “eight wonder of the world”. There is a good reason for such an importance to something so simple. See many fortunes have been built on this simple concept.

For example, Ben Franklin used the power of compound interest. Back in 1783, when he was 77, he added a new section to his will. He set up a codicil that was to last 200 years after his death. Ben allotted $5,000 Boston and Philadelphia each. The money was to provide loans to the needy young people. The borrowers were to pay back these loans at 5% interest over a 10 year periods.

Ben’s $5,000 investment over a period of 200 years grew to well over $20 million dollars and that is after each city took out half-a-million dollars for public works.

Given enough time, even little sums of money, invested wisely, can turn into sizable sums. The earlier you start in the process, the more benefit you derive from the snowball effect of compounding since not only do you achieve growth on your original investment but also on all of the growth it has achieved in earlier years.

Here are four tips to help you maximize the power of compound interest:

1. Start as soon as possible. The best friend of compounding is time. Getting rich is easier and less painful the earlier you start.
2. A little bit goes a long way. If you do not think that you have enough to invest, think about this if you invest $50 a month for a period of 20 years into a mutual fund earning an average of 10% annually, you will accumulate $528,000.
3. Be patient. Good things come to those who wait. You must be patient for compounding to work its power.
4. Don’t spend your earnings. Compounding works if you do not spend your earnings as you receive them, but reinvest all of those returns back into your account.

The effects of compounding are difficult to achieve in the short-term. The final lesson about the miracle of compounding is that time matters, so do not delay in starting your own investment plan.