It took me a long time to understand the incredible power of compound interest. I had always heard invest early and let time work for you, but it never meant that much to me. Maybe it’s because retirement seemed like a far away thing or maybe it was in one ear, out the other.
My Intent
Whatever it was, I didn’t pay enough attention to it. Back in February this year, I wrote a blog post titled The Massive Power of Compound Interest: 5 Examples. My intent was to show just how incredibly powerful compound interest is.
Since I struggled to grasp the concept of compound interest, I felt like if I could help just one person better understand its tremendous power, it would be a great win. With this post, I’m expanding on what I wrote before with more examples of the incredible power of compound interest.
My hope again is that this resonates with someone and encourages them to invest more.
The Snowball
Warren Buffett compares compound interest to a snowball rolling downhill. The snowball starts small but keeps rolling. As it rolls, it gains a little more snow. Then it rolls some more and picks up more snow, and more snow, and more snow.
This little snowball is now gargantuan in size and keeps picking up more and more snow. This is the perfect analogy to compound interest.
Some Numbers
Here are some numbers to demonstrate the incredible power of compound interest. Each scenario is going to assume an average return of 10 percent.
- Investing $100 per month for 50 years equals over $1,500,000
- An investment of $500 per month over 30 years comes out to $1,085,661
- Someone who invests a one-time windfall (bonus, inheritance, gift, etc) of $40,000 and never contributes again would have $1,124,097 in 35 years
Reality
Some scenarios like investing $100 per month for 50 years are unlikely to occur simply because the length of time is so great. That would be a 20-year old investing until they were 70, a 30-year old investing until 80, etc. A financially savvy parent could conceivably help their child invest starting at birth or age 5
These scenarios are simply to show the incredible power of compounding and what happens over time. The results of compounding are unbelievable and extraordinary.
