A Halloween Miracle!

A Halloween Miracle!

October 24, 2023

Happy Halloween! This year, instead of giving out Hershey Bars to the little ones, I decided to pass out nuggets of incredible information that could change your life forever if you start early. Many folks refer to the miracle of “Compounding” as the eighth wonder of the world. It was so miraculous that even Einstein couldn’t wrap his head around it.

The point is, you’re never too young to begin building an investment portfolio. In fact, investing when you’re young can have the potential to produce impactful earnings gains. And that’s because of a simple concept: compounding.

Like a snowball that grows as it rolls down a hill, compounding gives your money the opportunity to grow, if you are continually reinvesting your investment earnings. With compounding, the more you invest, the greater opportunity you have to create long-term value.

Kids, gather around…I’m going to give you a hypothetical example to illustrate the power of compounding. Let’s say that you invest $1,000 at age 20 and don’t add anything to the principal ever again. You just compound earnings for 50 years until you turn 70. If you take a 7.2% annual rate of return, by age 70, your $1,000 would have grown to $32,000! Not too bad, right?

Now let’s say you take the same approach but delay investing until you’re 30. So that $1,000 has 40 years to grow. And assuming the same annual rate of return of 7.2%, your $1,000 investment will have grown to $16,000. Not nearly as good. In fact, that’s a decrease of 50%!

Finally, if you invest $1,000 at age 20 and contribute just an additional $83 a month – or $1,000 a year – until you turn 70, assuming that same 7.2% annual rate of return, your total savings will reach $465,000. That’s nearly 15 times the first example, and 30 times the second example all for an additional $1,000 per year for 50 years.

To be clear, these were hypothetical examples and aren’t representative of any specific situation. They’re just to illustrate the power of compounding. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. So your results will vary.

There’s a fairly accurate formula that can help you estimate how long it would take for compounding to double an investment. It is called “The Rule of 72.” Just divide 72 by the annual rate of return. The answer is the approximate number of years it would take to double your investment’s value, assuming a fixed rate of return. As an example, if you earn 9% annually, it would take 8 years (72 divided by 9) to double the value of your investment. Please note that this formula does not guarantee investment results and is just to give you an approximate idea of how quickly your savings can grow when compounding is at play.

There you have it kids! As you dig through those buckets and pillowcases for that king size Reese’s Peanut Butter Cup, think about investing for your future ASAP. One day when you can afford to pass out king size candy bars on Halloween, you will be grateful that your younger self believed in the miracle of compounding!