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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Sunday, August 13, 2006

Power of Compounding

It is amazing to examine how investing early in life will help you in the long run. Compounding is the main reason for this.

If an investor started investing $2,000 per year for each of the next ten years. Then in 1990 they stopped putting in $2,000 annually and let their account grow until 2000. At this time you would have invested $20,000, but your portfolio worth would be almost $230,000 because of compounding. ANother investor waited 10 years and began in 1990 and invested $4,000 each year in stocks for 10 years. By the end of 2000 your totally amount invested would be $40,000 and your total portfolio worth would be only $105,700 because of compounding interest.

So start early, no matter how small the investment is will not matter because extra years of compounding will make a huge difference in your portfolio value.

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