June 25th, 2007 No Comments » | POSTED BY ROB

“The Miracle of Compounding”

The Fool has posted a great example demonstrating the power of compounding.

In the example, one person invests £100 a month for 10 years from the age of 20 -another also invests £100 per month for 30 years, but from the age of 30 (we’re also assuming they’re the same age, but one starts investing later).

On reaching the age of 60, despite having only invested for a third of the time of the second person, the first person has seen their investment grow by a significant amount – in this particular example, where an annual return of 9% is assumed (possibly a little optimistic, in my opinion), the first person ends up with £82,000 more.

The key here is of course the extra time that person 1 has given their investment to grow – interest upon interest gradually builds up. Of course, this is true for both investments and savings.

As the Fool points out, you don’t need to have a lot to save or invest each month, the key is to start as early as possible to benefit from compounding.