Many moons ago, I was locked away in a frigid lecture hall with stadium seating for Accounting 211 – my first accounting class. It was an 8am snoozefest and I wanted to poke my eyes out with my Bic #2 mechanical pencil. Except for the power of compounding.
Compounding Story
The class was required to graduate so I had no choice. Although boring, Professor Feldenkrais used many fun examples to help the class understand debits and credits.
There was a very valuable life lesson that I think about all the time. She gave us the example of investing money early in life and how it was a wonderful idea.
She walked us through an example of investing and the power of compounding:
- $2,000 invested per year (the Roth IRA limit at the time)
- 4% return per year
- Two different people – both who retired at 65 and lived until 90 years old
Melissa began investing $2,000 every year at the age of 18. Bobby waited until he was 30 years old and then invested $2,000 per year. What do you think the outcome was? Almost a $120K difference – all from compounding!
At the age of 65, Melissa has $266K and Bobby has $147K dollars. Melissa invested only $12K more and had $120K more in the end.
The Results of Time
This lesson was powerful and worth dragging my sleepy and baggy-eyed self to class early in the morning. Time does the work – not returns, not searching for the latest investment idea, not a complicated strategy. It’s boring. It’s tried and true. And it works.
When I learned the lesson, I didn’t have $2,000 but I did invest the few hundred dollars that I had. Every year, I would invest an amount of money that was manageable because this story was so moving. It’s worked incredibly well for me. The power of compounding is real.
Never Too Late
If you are over 18, or over 30, don’t worry about it. It’s never too late to start. People are living longer through advances in technology and science so you can get some compounding to work for you.
If you’d like to chat about this, it would be awesome. Let me know when you’re available.