"Most people overestimate what they can do in one year and underestimate what they can do in ten years." - Bill Gates
Last week I was discussing with a good friend how much value lies in compounding interest and how most people are not aware of it. And I think you can apply the same mechanics to any skill you develop in life.
To demonstrate how powerful compounding interest is, I am going to show you some investment examples. Many people my age would like to have a strategy when it comes to saving money. The earlier the better obviously, but you can also start later. What counts is the compounding ;).
So we have the following scenario: we start with 0$, we add 100$ per month and our annual return rate is 10% for 25 years. (Yes 10% is a lot but the MSCI World averages to 12% over a 10 year period. )
After 25 years we end up with a total capital of 133'789 $. It's not just a huge number, but what is really impressive is the multiple we have to our invested capital. The invested capital is just 30'000$. We multiplied our investment by roughly 4.5x.
Even though I knew the concept, it intrigues me every time how much leverage we get from investing consistently. What makes long term investing so attractive is that it just continues to grow. Its like a snowball rolling down a hill.
I think for our retirement savings it's one thing, but for our loved younger ones it's even better. Let's say we do the same for our kids and start investing at their birth.
Same thing, we start with 0 $. When they are 21 they have 85'855$. Perfect for long term investments. Same thing, we start with 0$, but we wait until they are 65, they have 6'112'540$!!! and the invested capital is 78'000$ (What the hell is going on here :D) So parents, listen up. Now it's the time to start investing in compounding products for your kids. Not tomorrow, not next year, but today!
Coming back to the topic of compounding effects, it's not just about money. The same goes for our habits, whether it's sport, friendships, work, etc. We should try to find things that will compound over time. Write daily, Read daily, Practice daily, etc.
Everyone's time is limited, so make the best out of it and invest in the things you enjoy the most.
Don't wait any longer and start now.
Disclaimer: I am not a professional investor and you should not take this as investment advice. I am just sharing my thoughts.
Enjoy! ❤️
Carveout (A thing unrelated to the main post but which I enjoy lately and I would like to share):
- Acquired Podcast: If you are interested in business you should definitely listen to this podcast. Its amazing.
- Cabled apple headphones: The phone quality for the listener is much much better than the wireless ones. You can make calls in full blown wind and its just fine.