Last time I talked about the power of compounding. Even saving a small amount every month can add up to a significant amount over time.
The real power of compounding starts to take effect if you continue saving for longer. Now you’re starting to earn interest on much larger amounts, so the interest is larger too.
The example below is in $’s and assumes that a higher amount is saved each year, but still gives a good impression of how much difference it makes when you’re able to save for a longer period of time.
Clearly if you invest the same amount each year for twenty years rather than ten years, you have saved twice as much. You are then not only receiving interest on a larger amount but you are also receiving interest on the interest already earned and kept in your savings account. Over time the impact of this becomes larger and larger as you can see from the graph.