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  • Writer's pictureLeoC

The Power of Compounding

How much do you think a penny is worth after it doubles every day for 30 days? $100 dollars? 1,000 dollars? 1,000,000 dollars? How about over $5 million dollars!!!!

Yes, more precisely, a penny doubled every day during 30 days will be worth $5,368,709.12.

How is this possible? Through the power of compounding.

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein

Compounding capital is one of the greatest tools an investors or trader can use to create wealth. It is one of Warren Buffett’s Holy Grails of investing success. The principle of compounding is that you allow your money to make more money.

While the growth of the doubling of a penny can be surprising and not intuitive there are ways to really compound capital with investing and trading over the long term at less impressive rates but still end up with a lot.

The rule of 72
The rule of 72

The rule of 72 is a useful heuristic that allows you to know how long will it take to double your capital based on the annual rate of return you are getting. For example: if you are making 9% annual rate of return it would take you "approximately" 72/9 = 8 years to double your capital.

It is good to think about the power of compounding whenever you are tempted to redeem your capital from a trading, investing, or retirement account. Ultimately, it can be very costly for you if you “miss the boat”.

We will see in the next post how easy it is for someone to be caught on the sidelines!!!



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