Compounding Archives - Scott's Thinking

Following on from the last few days, I’m combining retirement thoughts with compounding. The power of compounding is quite incredible.

I read an article recently about setting aside almost $3,000 for a child when they are born. This money could come from parents, grandparents, uncles and aunties or even from crowdfunding, I suppose.

The idea was that you could put that $3,000 into a low cost S&P 500 index fund and just let it sit there for 65 years. You would not take any out, nor would you need to put any more in. You would just let it roll over and compound.

Using the figures from the article, it noted the S&P had delivered an average annual return of between 10% and 11% in its nearly 100 years of existence. If it continued to average that rate, or even a little less (9.5%), the account would be worth over $1m by their 65th birthday.

This is more than 90% of what people would have in their retirement savings. By doing this one thing, during pregnancy or within the year after their birth, you would set them up for retirement. Regardless how their financial habits developed, they could always count on their $1m retirement fund when they turned 65.

The power of compounding is compelling.

Financial compounding is sometimes considered a wonder of the world. However, you can see compounding in nature too, if you look for it.

Let’s first review the common example of a penny doubled every day for 30 days. Would you rather be patient for 30 days or have $1m today?

Being patient pays off. After 30 days of doubling, that humble penny will be worth over $5m!! This is why consistent and frequent saving and investing is important for financial freedom. In the longer run, the difference can be very large.

We see compounding effects elsewhere too. Global population growth has shown strong growth over the last 100 years. It took thousand of years to reach the first billion people on Earth (1804). The second billion took 123 years. The third billion was only 33 years after that. You get the picture.

You also see this in animals, rodents, bugs, birds etc. And think how a chicken can produce one egg per day. Get a rooster involved and you can soon have dozens of chickens laying eggs and producing more chickens And more eggs to eat. Now some people aren’t so patient and want to eat the chicken for meat on day one. And then struggle or starve after that.

Think ahead, be patient and let nature take its course. When you see compounding in nature, use it to your benefit.

Tag: Compounding

The Power Of Compounding

See Compounding In Nature