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I created Wonder of Compounding as a blog to help readers better understand important financial topics and improve financial literacy. I do my best to keep content informative and applicable to people from various backgrounds. 

There’s no shortage of information on personal finance but the earlier you start this education, the more prepared you will be for the future. I think financial education should be a part of standard high school curriculums and this is why I wanted to start this blog to help people of all ages – young and old alike. 

Here’s a hypothetical situation: 

Would you take: 

  1. $1M Dollars
  2. 1 penny that doubles for 30 days

If you ask an average person, he or she would gladly take the million dollars. But option 2 is the better choice and leave you with $5.3M

How? That’s the power or, should I say, wonder of compounding

Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” This quote is usually attributed to Einstein but many argue whether or not he actually said it. Regardless, compound interest is a remarkable phenomenon.

Compounding has a huge impact on the outcome of money in the later years so it is crucial that you start saving early. 

On Day 18, the penny is worth only $1,300 but the magic of compounding occurs in the later years since the compounding is being applied to increasingly large numbers. 

As a hypothetical, let’s use the above example but instead of days, let’s pretend that each period represents a year and those 30 years are you saving for retirement. As you can see, a little investment over a long period of time can make you pretty wealthy.

You can do this calculation yourself using a compound interest calculator. The compound interest calculator can help you determine how much your money can grow using the power of compound interest.

As a realistic example, let’s say we saved $100 each month and invested in an S&P 500 index fund. The S&P 500 from 1991 to 2020 (a 30 year period) had an average stock market return of 10.72% (8.29% when adjusted for inflation). Past performance is not predictive of future returns but let’s use this average 10% return in the calculator.

At the end of 30 years, investing just $100, you will have $226,048.79!

You contributed a total of $36,000 but your investment is worth $226k.

The sooner you get started, the more the power of compounding can work for you!

Start your financial journey by understanding the basics.

Otherwise, take a look at the rest of the site.