Monday, October 03, 2011

The Power of Compounding

How it is possible for people who earn a little to grow their money into a huge sum of money?
A lot of people thinks that money needs to be earn and yet they've missed out on one of the most important part in growing money is through the power of compounding.
I'm sure a lot of people have actually heard of this term "compounding" but what does it really means to you? Do you really know what is compounding or have you been calculating if you compound the money how much return it will turn out in future?
Compound return is when you invest a sum of money at a particular percentage of return (rate of return and then instead of taking out the return earned (to spend it), what you actually do it to add it back to the principle amount and reinvest it as a larger sum of money. So that a year later you'll have a larger sum of money and you'll do the same again and again... it continues until the returns becomes greater and greater.

If you invest an amount with a rate of return of 20% and you compound it over time. It basically takes you less than 4 years to double your initial investment.

How long it takes to have your money double in value?
- Albert Einstein who is still one of the greatest mathematician of all time once discovered that in order to have an amount double in value. We use the Rule of 72.
- It basically takes 72 to divide the annual return in percentage and it will gives you the number of years your investment would double.

For example. you take 72 / 20% = 3.6 years.You'll see your money double in value in 3.6 years.

The Power of Compounding also helps today's greatest investor Warren Buffet to owned the greatest fortune in the world. Warren Buffet achieved an average annual return of 24.7% for 49 years and it means that he basically double his money in 2.9 years turning a mere $100,000 into $4,200,000,000 and still growing..
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