As a child of the seventies whose fanny was firmly planted in front of the TV during Saturday morning cartoons, I have an unhealthy recall of commercials from that time. Faberge’ used to have a catchy, if somewhat disturbing, ad for their shampoo where the spokes-model said she loved the product so much that she would tell two friends about it. And they’ll tell two friends and so on, and so on, and so on… Well, that’s how I like to think about compounding.
When the savings I put away today earns a positive return, not only does the initial investment grow, but that first year’s return will earn something the second year, and then those returns will earn something the following year, and so on, and so on… Obviously, this requires there to be an actual positive return on my investments, but you get the idea.
It’s also why folks always tout starting early with a savings plan. The longer that money is out there working for you, the greater the effect of compounding. There are even examples that show that if Jack and Jill put the same amount of money away for their long-term savings each month, but Jill starts years earlier, even if she stops after a period of time, Jack’s account won’t be able to catch up with Jill’s because of the impact of those earlier contributions compounding over time.
So if you haven’t started saving for your financial goals, get to it. By making just small adjustments to your spending habits, you could find additional money that could be put towards your emergency fund and financial goals pretty painlessly and harness the power of compounding for yourself.
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