This is a picture of when compounding mistakes finally crumble….
This was during that two day interview where Lance Armstrong opened up to none other than Oprah and admitted doping.
When I think of compounding mistakes, I can always turn to the Lance Armstrong story. I appreciate what he has gone through and how he has brought about awareness for testicular cancer (being a survivor myself). But how he handled the doping allegations is tough to ever appreciate.
During all of the investigations and through all of the victories, Lance Armstrong denied ever doping. He would go after people accusing him and, ultimately, he was so deep in the lie and had so many victories, he had to continue, had to compound his lie. When it all came to an end, the unraveling of the lie was very difficult because he was so deep into it already.
This is a simple example of a negative compounding effect. The first lie isn’t hard to unwind, but once you get multiple lies going to try and cover your tracks, it begins much more difficult to unravel.
But compounding can be a positive, especially for savers. And in the positive scenario, starting early is the best thing to do.
Compound this, compound that… enough, just tell me what it is!
In the investment world, compounding just means the ability to generate more earnings from your past earnings.
The idea is simply put when using some simple numbers. Say, we had $100 and we were able to earn 10% on that money. After the first year, we would have $110 ((100*10%)+100), which is $10 more than we had to begin the year. So, to start the next year, we would now have 110 and are able to earn 10% off of that. That means we would earn $11 ($1 more than we earned in the first year). And now we have $121. You get the point.
This would be similar to a retailer selling one shirt to person A. Then, just because they sold a shirt to person A, person B buys two shirts. And because person B bought two shirts, person C now buys four shirts and so on. The manager didn’t have to do anything; it was just because that first person bought a shirt. The moral of the story is that the more our money has the ability to compound, the more we begin to earn without having to do a thing. I, personally, like the sound of that!
A 10 year saver > A 30 year saver
This is where the fun begins and we can truly see the power of compounding. And the beautiful thing is that it doesn’t even mean you have to save, necessarily, forever, just early.
An individual that starts saving $200 a month at the age of 20 and stops saving, forever, at the age of 30 will have over $335,000 (assuming a 7.5% annual return) at the age of 60.
The individual that delays starting to save and decides to start saving $200 per month at the age of 30 and continues saving all the way until 60 isn’t as lucky. Assuming the same 7.5%, the individual would have less than $270,000.
To me, this BLOWS MY MIND!! The individual that started saving early only had to save $24,000. While the older individual had to save $72,000, and the late saver still isn’t even close to the younger person!
Let me break this down for everyone another way: the individual that started saving later puts away $48,000 more over the saving period and is left with over $65,000 LESS. That seems like a raw deal to me.
Compounding is something that does take favorites. It awards those that start early; and the award is very generous!
Enough reading, start SAVING
If you are still reading, you are wasting time.
The benefits should have already been expressed early. You need to go to your bank’s website and begin making a saving plan automatic. Every second, day, week, month or year you waste, the harder it’s going to be for you to reach your goals.
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