Yes it is that great. Compounding interest is the one thing that gives you a great advantage for starting to invest as a young lad. The more time you have the more your interest can compound and compound. Extending the time period that your assets are invested or increasing your average return rate, by either moving your investments to a riskier allocation or fun, then your earnings will start to increase at an exponential rate.
If you are not familiar with the term “compounding interest” let me explain. When your investment earns money, with your current interest rate, your earnings will begin to rake in earnings from it self. Then those earnings earn earnings and it goes on and on for the length of your investment. A small investment can start to accumulate a large amount of money very quickly do to this simple but amazing thing called compounding interest.
I will unfold an example for you to show exactly how wonderful compounding interest is and why the interest you earn on your investments you should not touch. Let's say you invest $10,000 today with an average annual rate of return of 12% for 10 years. During those 10 years each year you do not reinvest the interest. At the end of the 10 years you will have $22,000. That seems to be a reasonable gain from the looks of it, but when you compare it to an investment with compounding interest you start to see the power it holds. If you were to compound your interest and each year have your interest gain earnings as well you would have $28,394.21 at the end of the 10 years. That is almost a difference of $6400.
Are you convinced? I hope so. Nothing is more important, in the investing world, than time. When you are young time is your greatest advantage. By the above example you can see what compounding interest can do in just 10 years compared to simple interest. Imagine if you start investing as a 18 year old high school graduate and you start saving as much as you can at that age. By the time you are 60 years old you would have had 40+ years to invest and gain compounding interest on your investments.
Investing a large sum late in your life is nothing compared to the importance of starting young. Don't let your naivety of your youth impede your thoughts and distract you from doing what you should be doing now. Use your time to the best of your ability and start now.
Save now. Invest now. Be fruitful later.
