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Compounding

A wealthy man was asked if he had seen the seven wonders of the world. He responded, “No, but I do know the eighth wonder of the world—compounding.” It’s important to understand the three variables in compounding: the amount you save, the percentage rate you earn, and the length of time you save.

1.  The Amount

The amount you save depends on your income and spending. We hope you will increase the amount available for saving as you learn God’s way of handling money.

2.  Rate of Return

The second variable is the rate you earn on an investment. The following table demonstrates how an investment of $1,000 a year grows at various rates.

Percent Earned Year 5 Year 10 Year 20 Year 30 Year 40
6% 5,975 13,972 38,993 83,802 164,048
8% 6,336 15,645 49,423 122,346 279,781
10% 6,716 17,531 63,003 180,943 486,851
12% 7,115 19,655 80,699 270,293 859,142

As you can see, an increase in rate has a remarkable effect on the amount accumulated. A two percent increase almost doubles the total over 40 years. But since higher returns usually also carry higher risks, be careful not to shoot for unrealistic returns.

3.  Time

Time is the third factor. Answer this: Who would accumulate more by age 65: Jennifer who started saving $1,000 a year at age 21, saved for eight years, and then completely stopped; or Matt who saved $1,000 a year for 37 years starting at age 29? Both earned 10 percent. Is it Deborah who saved a total of $8,000 or Matt who saved $37,000? Check out the following chart.

Deborah Matt
Age Contribution Year-end Value Contribution Year-end Value
21 1,000 1,100 0 0
22 1,000 2,310 0 0
23 1,000 3,641 0 0
24 1,000 5,105 0 0
25 1,000 6,716 0 0
26 1,000 8,487 0 0
27 1,000 10,436 0 0
28 1,000 12,579 0 0
29 0 13,837 1,000 1,100
30 0 15,221 1,000 2,310
31 0 16,743 1,000 3,641
32 0 18,417 1,000 5,105
33 0 20,259 1,000 6,716
34 0 22,284 1,000 8,487
35 0 24,513 1,000 10,436
36 0 26,964 1,000 12,579
37 0 29,661 1,000 14,937
38 0 32,627 1,000 17,531
39 0 35,889 1,000 20,384
40 0 39,478 1,000 23,523
41 0 43,426 1,000 26,975
42 0 47,769 1,000 30,772
43 0 52,546 1,000 34,950
44 0 57,800 1,000 39,545
45 0 63,580 1,000 44,599
46 0 69,938 1,000 50,159
47 0 76,932 1,000 56,275
48 0 84,625 1,000 63,003
49 0 93,088 1,000 70,403
50 0 103,397 1,000 78,543
51 0 112,636 1,000 87,497
52 0 123,898 1,000 97,347
53 0 136,290 1,000 108,182
54 0 149,919 1,000 120,100
55 0 164,911 1,000 133,210
56 0 181,402 1,000 147,631
57 0 199,542 1,000 163,494
58 0 219,496 1,000 180,943
59 0 241,446 1,000 200,138
60 0 265,590 1,000 221,252
61 0 292,149 1,000 244,477
62 0 321,364 1,000 270,024
63 0 353,501 1,000 298,127
64 0 388,851 1,000 329,039
65 0 427,736 1,000 363,043
8,000 37,000

Incredibly, Deborah accumulated more because of the earlier start. So start saving now!

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