Course 111:
Exploit the Magic of Compounding
In this course
1 Introduction
2 Keeping Costs Down
3 The Tax Man
4 The 0% Loan

Time is on your side.

A dollar invested at a 10% return will be worth $1.10 in a year. Invest that $1.10 and get 10% again, and you'll end up with $1.21 two years from your original investment. The first year only earned you $0.10, but the second generated $0.11. This is compounding at its most basic level: gains begetting more gains. Increase the amounts and the time involved, and the benefits of compounding become much more pronounced.

When compounding, the earlier you start, the better off you'll be. Let's consider the case of two investors, Joe and Sam. Say that Joe put $1,000 into the market at age 25 and earned a 10% aftertax return. Sam also put in $1,000 and earned the same return, but waited until he was 35 to do so. When both were nearing retirement at age 60, Joe ended up with $28,102, while Sam only has $10,834 from his investment.

To truly benefit from the magic of compounding, it's important to start investing early. After all, it's not just how much money you started with that counts, it's also how much time you've allowed that money to work for you.

Next: Keeping Costs Down >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.