The Power Of Compounding
Many of the world’s greatest fortunes were made using the power of compounding. And you can build your wealth with this same strategy, too.
Think of it like a snowball rolling down a hill. It gains momentum and accumulates more snow. Eventually, it becomes massive.
The ultimate size of your snowball depends on two things: how big of a snowball you start with and how long your hill is.
Investing legend Warren Buffett likes to use these three examples to drill this point home…
Queen Isabella in 1492: Let’s say she had the choice of investing in Christopher Columbus’ voyages to the New World … or investing that same amount of money at a 4% compound annual interest rate. Which would’ve a higher return over time?
Well, Queen Isabella invested the equivalent of $30,000 into Columbus’ journey. In today’s dollars, that’s over $1 million. But $30,000 invested at a 4% annual rate back then would be worth well over $29 trillion today. That’s more than the U.S. gross domestic product of $22 trillion.
King Francis in 1519: Imagine if he had the choice of buying the Mona Lisa or investing that same amount of money with 6% compound annual interest. Which would end up with the higher return over time?
King Francis acquired the famous painting for about $20,000. Today, the Mona Lisa is estimated to be worth $1 billion. But $20,000 invested at a 6% annual rate back then would be worth well over $95 quadrillion today.
And finally, the Lenape Indians in 1626: That year, Peter Minuit bought Manhattan Island from them for $24. But what if they had the choice to invest that money at just a 7% compound annual rate? Would it be worth more than all the real estate in present-day Manhattan?
You probably know where this is going … Manhattan’s land value today is roughly $1.8 trillion. But that same $24 earning a compounded 7% a year would’ve turned into over $9 trillion today. That’s about five times more!
In all three cases, you would’ve been much better off investing money even at low rates of return. That’s the magic effect of compounding.
The best part is that once you unleash the power of compounding, there’s no stopping it. Your money will inevitably continue growing with amazing speed. All you have to do is leave your money alone and let it work for you.
Here’s what most people get wrong…
They think you need to compounded your money at 50%, 75% or more per year. But if you look at Buffett, you’ll see that he built his fortune by compounding his money at only 20% per year.
Of course, there’s only one Warren Buffett. But this same process can help you easily turn your nest egg into $1 million or more.
As long as your gains are consistent, time will do the heavy lifting for you. Whether you have just $10,000 and plenty of years left … or you’re starting with $100,000 with less time ahead, you have the chance to make millions with steady returns.
So, be sure to check how the power of compounding can work for you by using our compound calculator on this page.
Results Will Appear Here
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Interest compounded . Yearly deposits made at the of each compound period.