Financial compounding involves reinvesting earned interest or returns, leading to exponential growth over time. It's the process of earning interest on both the initial investment and the previously earned interest, which can significantly amplify the overall returns on an investment. Giving time to compound is powerful strategy for your investments . The best way to explain this are by examples and also use the compounding calculator to try for yourself.
If you saved $100 a month for 25 years with no interest.
After 25 years you would have $30,000 ($100 x 12months x 25 years)
What about if you were able to get 8% interest on that same $100 and compound that every year. To make the maths easier we will say $1,200 a year with an annual interest of 8%. After 25 years you would have $94,745 from the same $100 a month.
How this works is that the interest is compounding every year from a higher amount, so the interest is higher each year.
Many young people don’t start to invest because they don’t think they have enough money to invest and will do it when they are older when earning more money.
Let’s see if this is true
40-year-old person able to starts saving $1,000 a month retiring at 65 with 8% compounding interest. This would an impressive $947,453 at the age of 65
20-year-old person saves just $200 a month until the age of 65 again with 8% compounding
This would be even more at $1,001,823 by the age 65
This is the greatest example you can have that you should start investing and saving as young and soon as possible even if it’s a small amount