It’s hard to imagine saving $30,000. But $1 – that’s easy. And you can turn that $1 into $30,000 without breaking a sweat. All it takes is…
Time. It’s one of the most important factors when it comes to building wealth. And the sooner you get started, the more time your money has to do magical work called compounding.
That magic power can turn $1 into more than $30,000.
Compounding happens when your money – your initial investment – starts earning interest or dividends or capital gains (when stock or fund prices go up). Those earnings get added to your initial investment, and then they start earning interest, too. So now you’re earning interest on interest – and that’s compounding.
Here’s how it works: Let’s say you start with $1,000 in an investment account, and it earns $100 in the first year. The next year, you earn interest on $1,100 (your original $1,000 plus the first $100 it earned), and end the year with $1,210 ($1,100 + $110 more interest earned)…and that just keeps going.
The most important part of the compounding process is time. More time means more money. So if two people put away the same amount of money, down to the penny, the one who starts earlier will end up with more because of compounding.
And if you combine compounding with consistent savings, your wealth will build that much faster. So if you put away $1 a day, just $30 a month, for 30 years, you’d have saved $10,800. But add compounding to that $1 a day, even at a conservative 6% rate of return (how much your money earns annually) you’d end up with $30,168.
That’s how the magic of compounding can turn $1 into more than $30,000, right before your eyes.