The power of compounding

Sorry, com what?

In other articles I have already talked about making your money work for you. Compounding is a tool for that. It basically means that the money you earn with your investment, whether it is interest or profit, is reinvested so that you get more profit or interest on the new amount. Compounding = stacking.

An example:

You are having a child! All joy of course but you can also see the storm coming from all the costs that come with it. And by the time they leave home it would be nice if you could help them buy a house and that they can enter the next phase of their lives without student debt.

For the example, I'll assume €100 per month for 20 years. In stocks, you have an index fund called the S&P 500. This fund has an average return of 10.28% per year over a period of 30 years.

This includes extreme situations in the market such as crashes or very positive times. The trick is to remain steadfast no matter what the market does. Especially when the market crashes you quickly get the urge to cut your losses and cash out. So don't do it!

Through the power of compounding, the following happens: over a period of 20 years you invest (€100x12)x20=€24,000. After 20 years with an annual ROI (Return On Investment) of 10%, you have €75,936.88 in your account. More than enough to pay for all possible studies and to contribute to a first home.

The same goes for building up a retirement fund. Suppose you are 35 and you are steady in your career or own business. You can miss €300 per month. So you put in (€300x12)x20=€72,000. After 20 years at 10% ROI you have €227,810.64.

Conclusion

Working does not create freedom. Saving does not create freedom. Investing creates freedom!

The power of compounding makes your money worth more without you having to do anything. Except being strong enough to leave your money exactly where it is!

Even with an average inflation of 2% in the Netherlands over 30 years, your money will retain its value.

To achieve optimal returns, it is smart to start investing as early as possible.

It is really possible for everyone to become financially independent if you are aware of the possibilities. No money to invest you say? Then read 'The Latte Factor' and 'The 10% rule' and see that you really do have money to invest.

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