Power Of Compounding Money Illustrated – Best Motivation To Start Saving Money Today 4


Let’s face it, saving money is hard. If it were easy, everyone would be able to do it effortlessly. We are conditioned to spend money today instead of saving and investing it so we can have more money in the future. For many people, savings must be forced. One way of doing this is by automating your savings so that 10% of each paycheque goes directly into your savings account. Whilst this is a great method to build up your savings account, I don’t like saving and investing money to be forced upon someone. I want people to actually want to save money. I believe that if people learn about compound interest and compounded returns, they will want to start saving today.



What is Compounding?

Compound interest or compound returns are the interest or returns computed on the sum of an original principal and accrued interest/returns. 

The power of compounding is best illustrated using an example.

Take two investors. One is Jack who opens an Investment and Savings account (ISA) at the age of 19 and diligently puts away £2,000 a year for saving years in his ISA. After 7 years, Jack makes NO MORE contributions — he’s finished.

The second investor, Jill, only opens an ISA account when she is 26 years old (the age Jack was finished paying money into his saving account). Jill continues faithfully to contribute $2,000 every year until she’s 65 years old.

You would think that Jill who has paid in £2,000 for 33 more years than Jack would end up with more money. But this is Not the case.

Jack, who made his contributions earlier and who made only seven contributions, ends up with MORE money than Jill, who made 40 contributions but at a LATER TIME. The difference in the two is that Jack had seven more early years of compounding than Jill. Those seven early years were worth more than all of Jill’s 33 additional contributions. This is the POWER OF COMPOUNDING. (Have a look at the table below to see how this works).

By understanding compounding, you will hopefully learn why it is better to start saving and investing today as opposed to tomorrow. By understanding compounding, you learn that you need to make money work hard for you as opposed to the other way round. By understanding compounding,  the hope is that you gain more willpower to save money in order to secure your financial future.

Compounded returns table below:

Jack Jill
Age Contribution Year End Value Contribution Year End Value

19

£2,000

£2,200

20

£2,000

£4,620

21

£2,000

£7,282

22

£2,000

£10,210

23

£2,000

£13,431

24

£2,000

£16,974

25

£2,000

£20,872

26

£22,959

£2,000

£2,200

27

£25,255

£2,000

£4,620

28

£27,780

£2,000

£7,282

29

£30,558

£2,000

£10,210

30

£33,614

£2,000

£13,431

31

£36,976

£2,000

£16,974

32

£40,673

£2,000

£20,872

33

£44,741

£2,000

£25,159

34

£49,215

£2,000

£29,875

35

£54,136

£2,000

£35,062

36

£59,550

£2,000

£40,769

37

£65,505

£2,000

£47,045

38

£72,055

£2,000

£53,950

39

£79,261

£2,000

£61,545

40

£87,187

£2,000

£69,899

41

£95,905

£2,000

£79,089

42

£105,496

£2,000

£89,198

43

£116,045

£2,000

£100,318

44

£127,650

£2,000

£112,550

45

£140,415

£2,000

£126,005

46

£154,456

£2,000

£140,805

47

£169,902

£2,000

£157,086

48

£186,892

£2,000

£174,995

49

£205,581

£2,000

£194,694

50

£226,140

£2,000

£216,364

51

£248,754

£2,000

£240,200

52

£273,629

£2,000

£266,420

53

£300,992

£2,000

£295,262

54

£331,091

£2,000

£326,988

55

£364,200

£2,000

£361,887

56

£400,620

£2,000

£400,276

57

£440,682

£2,000

£442,503

58

£484,750

£2,000

£488,953

59

£533,225

£2,000

£540,049

60

£586,548

£2,000

£596,254

61

£645,203

£2,000

£658,079

62

£709,723

£2,000

£726,087

63

£780,695

£2,000

£800,896

64

£858,765

£2,000

£883,185

65

£944,641

£2,000

£973,704

Less Total Invested

-£14,000

-£80,000

Equal Net Earning

£930,641

£893,704

Money Grew 66 fold 11 fold




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