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The Power of Compounding
The best argument we've seen for teaching
children about finance and the power of compounding
is summed up by the table below. These figures
are based on an assumed annual rate of return of 10 percent, with no withdrawals and no
taxes. Whether these conditions are attainable or desirable is beside the point. This
table merely illustrates a principal that's based purely on mathematics. Assuming the same
rate of return (10 percent) in each of the two examples, a person who invests early and
for just eight years will have more money at 65 years old than will someone who starts
late and invests for nearly 40 years. Naturally, someone who starts early and
doesn't stop has the potential to do much better than either of these examples.
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Example 1: |
|
Example 2: |
|
| Age |
Annual Investment |
Year-End Value |
Annual Investment |
Year-End Value |
| 19 |
$ 2,000 |
$2,200 |
$ 0 |
$ 0 |
| 20 |
$ 2,000 |
$4,620 |
$ 0 |
$ 0 |
| 21 |
$ 2,000 |
$7,282 |
$ 0 |
$ 0 |
| 22 |
$ 2,000 |
$10,210 |
$ 0 |
$ 0 |
| 23 |
$ 2,000 |
$13,431 |
$ 0 |
$ 0 |
| 24 |
$ 2,000 |
$ 16,974 |
$ 0 |
$ 0 |
| 25 |
$ 2,000 |
$ 20,872 |
$ 0 |
$ 0 |
| 26 |
$ 2,000 |
$ 25,159 |
$ 0 |
$ 0 |
| 27 |
$ 0 |
$ 27,675 |
$2,000 |
$2,200 |
| 28 |
$ 0 |
$ 30,442 |
$2,000 |
$4,620 |
| 29 |
$ 0 |
$33,487 |
$2,000 |
$7,282 |
| 30 |
$ 0 |
$36,835 |
$2,000 |
$10,210 |
| 31 |
$ 0 |
$40,519 |
$2,000 |
$13,431 |
| 32 |
$ 0 |
$44,571 |
$2,000 |
$16,974 |
| 33 |
$ 0 |
$49,028 |
$2,000 |
$20,872 |
| 34 |
$ 0 |
$53,931 |
$2,000 |
$25,159 |
| 35 |
$ 0 |
$59,324 |
$2,000 |
$29,875 |
| 36 |
$ 0 |
$65,256 |
$2,000 |
$35,062 |
| 37 |
$ 0 |
$71,782 |
$2,000 |
$40,769 |
| 38 |
$ 0 |
$78,960 |
$2,000 |
$47,045 |
| 39 |
$ 0 |
$86,856 |
$2,000 |
$53,950 |
| 40 |
$ 0 |
$95,541 |
$2,000 |
$61,545 |
| 41 |
$ 0 |
$105,095 |
$2,000 |
$69,899 |
| 42 |
$ 0 |
$115,605 |
$2,000 |
$79,089 |
| 43 |
$ 0 |
$127,165 |
$2,000 |
$89,198 |
| 44 |
$ 0 |
$139,882 |
$2,000 |
$100,318 |
| 45 |
$ 0 |
$153,870 |
$2,000 |
$112,550 |
| 46 |
$ 0 |
$169,257 |
$2,000 |
$126,005 |
| 47 |
$ 0 |
$186,183 |
$2,000 |
$140,805 |
| 48 |
$ 0 |
$204,801 |
$2,000 |
$157,086 |
| 49 |
$ 0 |
$225,281 |
$2,000 |
$174,995 |
| 50 |
$ 0 |
$247,809 |
$2,000 |
$194,694 |
| 51 |
$ 0 |
$272,590 |
$2,000 |
$216,364 |
| 52 |
$ 0 |
$299,849 |
$2,000 |
$240,200 |
| 53 |
$ 0 |
$329,834 |
$2,000 |
$266,420 |
| 54 |
$ 0 |
$362,818 |
$2,000 |
$295,262 |
| 55 |
$ 0 |
$399,100 |
$2,000 |
$326,988 |
| 56 |
$ 0 |
$439,010 |
$2,000 |
$361,887 |
| 57 |
$ 0 |
$482,910 |
$2,000 |
$400,276 |
| 58 |
$ 0 |
$531,202 |
$2,000 |
$442,503 |
| 59 |
$ 0 |
$584,322 |
$2,000 |
$488,953 |
| 60 |
$ 0 |
$642,754 |
$2,000 |
$540,049 |
| 61 |
$ 0 |
$707,029 |
$2,000 |
$596,254 |
| 62 |
$ 0 |
$777,732 |
$2,000 |
$658,079 |
| 63 |
$ 0 |
$855,505 |
$2,000 |
$726,087 |
| 64 |
$ 0 |
$941,056 |
$2,000 |
$800,896 |
| 65 |
$ 0 |
$1,035,161 |
$,2000 |
$883,185 |
| Less $ invested |
|
($16,000) |
|
($78,000) |
| |
|
$1,019,161 |
|
$805,185 |
| Money increased |
|
64 fold |
|
10 fold |
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