Updated: May 5
Probably the most powerful, and sometimes misunderstood, concept in finance
Compounding is an extremely powerful force in finance, and it works to investors’ advantage. Even though the concept might be widely understood, seeing the magnitude of it is sometimes eye-opening. It is why young adults and new employees are strongly encouraged to start saving as soon as possible, even if it is only a little. That initial amount will expand over time like a snowball rolling down a hill.
The infographic below explains how the time component can be a larger influence on future wealth than the amount invested.
To provide more context, we created two simple tables showing various future values based on different annual returns and time periods. The first table is based on saving $500 per month and compounded monthly. The second is saving $6,000 a year, deposited at the end of the year. These are equal amounts of annual savings, just different timing. These amounts were chosen because $6,000 is the current annual limit for contributing to an IRA.
Table 1. $500 per month
Table 2. $6,000 per year
Source: Jackson Creek Investment Advisors. Illustrative only. See full disclosure at bottom of main blog page.
The second table’s future values are slightly lower for each corresponding period and rate of return. Using the middle row and column (40 years at 6%) as an example, the one-time annual investment of $6,000 is $67,174 less than monthly $500 contributions with a similar 6% return for 40 years ($928,572 vs. $995,745).
Even if savings rates are not always as neat and consistent as we hope, contributing anything will help. The point is – the sooner the better.
This content was created by a third party. All opinions, comments, conclusions are of the author and not Jackson Creek Investment Advisors LLC. The information published herein is provided for informational purposes only and does not constitute an offer of investment advisory services. All information is subject to change without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit to your risk and return preferences. Investment recommendations may change, and readers are urged to check with their investment advisors before making any investment decisions. Information provided is obtained from sources believed to be reliable, but we cannot attest to its accuracy. Past performance is not necessarily indicative of future returns. Investment advisory services are offered through Jackson Creek Investment Advisors LLC, a Registered Investment Adviser.