Have you ever heard the saying, ‘it’s never too early to start saving’? One of the most important reasons why this statement rings true, in my humble opinion, is the power of compounding. What is compounding you ask? Compounding is the process whereby investments make returns, and those returns make returns, and so on. The more time you have, the more “so-on’s” you can add to that sentence, and the bigger and bigger the potential returns get. Albert Einstein once described compound interest as the greatest invention of mankind.
Here are a few examples of why smart investors have listened to Einstein and put the power of compounding to work:
• $1 saved at birth (parents will have to be the driving force behind this one), compounded at 10% annually will become $539.41 at age 66.
• $1 saved at age 20, compounded at 10% annually will become $80.18 at age 66.
• $2 saved at age 30, compounded at 10% annually will become $61.83 at age 66.
Some may say, how in the world can I consistently receive a 10% annual return. The S&P 500 index has compounded at a rate of 10% for the past 88-years. So, the answer is easy – invest in a low-cost S&P 500 mutual fund or ETF.
There is one other thing you will need for the above scenarios to work – patience. Investing can test anyone’s patience, especially during the 24-hour news cycle we live in. You don’t need a lot of money to see the benefit of compounding but you need to have patience – don’t let your short-term fears drive your emotions. Or better year, reach out to a trusted investment advisor to help put you on the right path and calm those emotions.
- Brian Valenti
Generation Capital Management (GCM) is an independent, SEC-Registered Investment Advisor located in Rochester, NY. Since 2003, we have provided value to our clients through a premium level of investment service and an unbiased, effective investment process. If you have questions or need additional information, please feel free to contact us at: (585) 232 – 8560. Generation Capital Management can help you meet your objectives today, tomorrow and for generations to come. We're ready to work for you.