The magic of compounding is truly a remarkable thing. It is the idea that money invested can generate more and more money that eventually can snowball into impressive amounts (side note: here’s my thought experiment where a penny doubled every day becomes over $21 million in only a month!) Compounding has massive implications for our ability to accumulate wealth. Unfortunately, it seems that most people do not understand this principle, or do not believe it will work for them.
I am very appreciative that I “got the bug” awhile ago. Eight years of saving and investing later, my wife and I are in a better financial position because we (a) saved and invested along the way, and b) positioned our saved capital to keep growing.
If you save regularly, stay the course through thick and thin, you will accumulate. The numbers don’t lie. According to this financial calculator, a 20 year old can save a mere $1211 per year in a retirement account and be on their way to a million dollars by the age of 65 (the example assumes they earn 8% annually and raise their contributions by 5% each year ). As long as they keep saving, year after year, it is practically guaranteed that forty-five years later they will have accumulated a huge stash, likely a seven-figure one!
Knowing things like this delights me. I feel like I’ve learned one of Harry Potter’s magic spells and am on my way to wizarding mastery. Yet when I have tried to explain how compounding works to other people in my life, I have met with little success. It seems that understanding the power of investing is like certain acquired tastes or fads with cult followings: you either get it or you don’t.
To be fair, money is one of the most loaded topics on Planet Earth (along with love, God, and sex!). Most of us (myself included) have received all kinds of weird programming about it. Many people have strange and distorted views which obscure their path to financial ease and abundance. I’m sure that telling people there’s a simple process to get wealthy can feel (to them) like telling them that all they need to get to the moon is walk up the next rainbow they see in the sky!
Also, compounding relies on following a long-term, slow-and-steady plan. I am built for this kind of thing, but most people probably are not (that is not a knock–we all have different talents). Many people are not numbers inclined, either. It is unrealistic to expect the masses to salivate over planning their future wealth on a spreadsheet. Yet it is precisely this kind of math and numbers thinking that helps people realize the power of compounding.
For those who get it, I salute you. For those who don’t, I forgive you. You have you own strengths and personal convictions that aid you in this life journey just as mine aid me.
However, let me know if you ever want me to help you see the light 😉