The Power of Compounding – Study Done by Market Logic

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In order to emphasize the importance of time in the power of compounding, I am including this extraordinary study done by Market Logic, of Ft. Lauderdale, FL 33306.

In this study we assume that investor B opens an IRA at age 19. For seven consecutive periods, he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years, this fellow makes NO MORE contributions—he’s finished.

A second investor, A, makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year till he turns 65 (at the same theoretical 10% rate).

Now study these incredible results: B, who started investing at an earlier age and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven additional years of compounding than A; those seven early years were worth more than all of A’s 33 supplementary contributions.

I exhort you to introduce this study to your kids. It reiterates the fact that the earlier you start, the richer you will be.

INVESTOR A INVESTOR B
Age Contribution Year-End Value Contribution Year-End Value
8 0 0 0 0
9 0 0 0 0
10 0 0 0 0
11 0 0 0 0
12 0 0 0 0
13 0 0 0 0
14 0 0 0 0
15 0 0 0 0
16 0 0 0 0
17 0 0 0 0
18 0 0 0 0
19 0 0 2,000 2,200
20 0 0 2,000 4,620
21 0 0 2,000 7,282
22 0 0 2,000 10,210
23 0 0 2,000 13,431
24 0 0 2,000 16,974
25 0 0 2,000 20,872
26 2,000 2,200 0 22,959
27 2,000 4,620 0 25,255
28 2,000 7,282 0 27,780
29 2,000 10,210 0 30,558
30 2,000 13,431 0 33,614
31 2,000 16,974 0 36,976
32 2,000 20,872 0 40,673
33 2,000 25,139 0 44,741
34 2,000 29,875 0 49,215
35 2,000 35,062 0 54,136
36 2,000 40,769 0 59,550
37 2,000 47,045 0 65,505
38 2,000 53,950 0 72,055
39 2,000 61,545 0 79,261
40 2,000 69,899 0 87,187
41 2,000 79,089 0 95,905
42 2,000 89,198 0 105,496
43 2,000 100,318 0 116,045
44 2,000 112,550 0 127,650
45 2,000 126,005 0 140,415
46 2,000 140,805 0 154,456
47 2,000 157,086 0 169,902
48 2,000 174,995 0 186,892
49 2,000 194,694 0 205,581
50 2,000 216,364 0 226,140
51 2,000 240,200 0 248,754
52 2,000 266,420 0 273,629
53 2,000 295,262 0 300,992
54 2,000 326,988 0 331,091
55 2,000 361,887 0 364,200
56 2,000 400,276 0 400,620
57 2,000 442,503 0 440,682
58 2,000 488,953 0 484,750
59 2,000 540,049 0 533,225
60 2,000 596,254 0 586,548
61 2,000 658,079 0 645,203
62 2,000 726,087 0 709,723
63 2,000 800,896 0 780,695
64 2,000 883,185 0 858,765
65 2,000 973,704 0 944,641
Less Total Invested: 80,000   14,000
Equal Net Earnings: 893,704   930,641
Money Grew: 11-fold   66-fold

 


Remember that as time passes, the power of compounding accelerates dramatically. If you’re a young person, all you need to know is that you must start early to stay ahead in the game of compounding and wealth creation. The best time to plant a seed was twenty years ago; now is your second opportunity to do the same. Do not waste a day!