compounding

Starting to save for retirement or long term goals early gives you a big advantage, as you won't
need to put in as much money to reach the same goals. Here's how it works.

There are two parts to any investment: the principal (original money you put in) and the
earnings on that principal.

Compounding occurs when the earnings of invested funds start to earn also. This generally
happens when investments have the benefit of time to grow. It can be an exponential way to
grow your investments over the long term.

For example, starting with $30,000, what does it take to grow it ten times larger to $300,000?
If you put $30,000 into an investment that grew at 6.5% annually, compounding monthly, and
left it there for 36 years with no added contributions, you'd end up with over $300,000.

The earnings on the earnings will greatly exceed your original contribution. This is
the magic of compounding--to reach large sums, you only need to save smaller amounts early
on, and let time do its work.

Of course, if you kept investing regularly, rather than stopping at $30K you'd have much more.

If you're in your 20s, 30s or 40s in age, you can make a big difference to your future by
saving regularly. Even starting at a later age, and giving your money at least two decades to
grow, will help.

In our example above, $30,000 could be saved in about 8 years by putting aside $250 per
month at 5% compounded monthly. Find a monthly savings goal that's comfortable for you,
and get started on your own plan.

Read this link, "Behold the miracle of compounding", from Kiplinger.com for examples of how
time really grows your savings.

Go to the savings tools at Bankrate.com and do "what if" scenarios to see how far you can
get with modest monthly savings. You might be surprised!
Robin Applegarth

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