The Power of Compounding

compounding

If someone offered you a million dollars today, or a penny doubled every day for a month, which would you choose?

If you think it’s a trick question, you’re right. You’d be a fool to take the million dollars, because a penny doubled every day for 30 days becomes $10,737,418.24. What the #$@&%*!?

Yup, you read that correctly — over ten million dollars. In the spirit of financial literacy month, let’s review the principle that has the power to turn a penny compounding at 100% daily return into $10,737,418.24 in just 30 days.

Here’s how it works:
Imagine you invested $100, and your hypothetical investment averaged a 10% annual return.

After the first year, your $100 would earn 10%, or $10. So, you’d have $100 + $10, or $110.

In your second year, you’d start with $110, and earn 10% of that, or $11. So you’d have $110 + $11, or $121.

In your third year, you’d start with $121, and earn 10% of that, or $12.10. So you’d have $121 + $12.10, or $133.10

In your fourth year, you’d start with $133.10, and earn 10% of that, or $13.31. So you’d have $133.10 + $13.31, or $146.41

If you held your investment for 20 years with the same average annual return, your initial investment of $100 would be worth $672.75. That’s some hard working money!

It’s called compounding. It may seem like magic, but it’s really math. Einstein supposedly called compounding ‘the most powerful force in the universe.’

The secret behind the math is that your earnings, no matter how small in the beginning, have the potential to make earnings, too. And over time, they can really add up.

What does compounding mean for you?
1. It doesn’t matter how much you start with– you just have to start. The beauty of compounding is that you don’t need a lot of money to unlock the benefits. Compounding works with a penny, $5, or $1 million. So invest what you can afford, on a regular basis, and let compounding work for you.

2. It’s all about the dividends. When companies make a profit, they sometimes share those profits with their investors. They’re called dividends, and you should get to know them better. If you reinvest those dividends, that money is affected by compounding, too. In the long run, that money has the potential to earn you more. Money that earns money, that earns money? Sounds like a pretty sweet deal to me.

3. Stay in this for the long term. It should come as no surprise that the magical component of this mathematical formula is time. As a young investor, time is on your side. In order to reap the benefits of compounding, start now and let that time work in your favor.

Which brings us back to number 1 — it doesn’t matter how much you start with — you just have to start.

 







Disclaimers
This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit www.stashinvest.com/disclosures.

**Investing involves risk and investments may lose value. Before investing, consider your investment objectives, financial resources, experience, risk factors, and StashInvest fees. Past performance does not guarantee future results. Investment outcomes and projections are hypothetical in nature. More information and important disclosures can be found here.