When my wife and I sit down to look at our wealth generation plan for retirement, she doesn't quite understand how we will reach our target by the time we want to retire. With the current savings scenario, we are projecting to have about three times the savings we currently have.
Apart from pouring as much money as we can into our retirement savings, the effect of compounding will have an enormous impact on whether we achieve our financial goals or not.
Compounding is the ability of an asset to generate earnings, which are then reinvested or remain invested to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Suppose you invested $100,000, and in the first year, your investment returned 10%. Your investment is now worth $110,000. The investment returns another 10% in the second year, so your investment of $110,000 now grows to $121,000. Rather than your investment appreciating an additional $10,000 in the second year, it appreciates by an additional $11,000 because the $10,000 you gained in the first year grew by 10% too.
Compounding has the potential to impact the earning potential of your investments positively. But, because time and reinvesting make compounding work, you will need to keep the principal and earnings invested to benefit from the compounding effect.
Apart from pouring as much money as we can into our retirement savings, the effect of compounding will have an enormous impact on whether we achieve our financial goals or not.
Compounding is the ability of an asset to generate earnings, which are then reinvested or remain invested to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Suppose you invested $100,000, and in the first year, your investment returned 10%. Your investment is now worth $110,000. The investment returns another 10% in the second year, so your investment of $110,000 now grows to $121,000. Rather than your investment appreciating an additional $10,000 in the second year, it appreciates by an additional $11,000 because the $10,000 you gained in the first year grew by 10% too.
Compounding has the potential to impact the earning potential of your investments positively. But, because time and reinvesting make compounding work, you will need to keep the principal and earnings invested to benefit from the compounding effect.
