**Compounding is the eighth wonder of the world.**

**Those who understand it, earn it. Those who don’t, pay it.**

Learn everything you need to know about **the power of compounding** in this article.

# A penny that doubles every day

**Let’s say that you have the choice between two sums of money:**

$1 million in cash

A penny that doubles every day for a month

Which one would you choose?

Does the above sound like a difficult question to you?

Let’s give you a hint.

**A penny that doubles every day would be worth $0.16 on day 5 and $5.12 on day 10.**

You will probably know that a penny that doubles for a month will be worth more than $1 million. Why else would I ask you this question?

**Well, a penny that doubles 30 times would be worth more than $10.7 million!**

**Here’s the math:**

**Please note that in this example it took until the 27th day (!) for the penny to be worth more than $1 million.**

The fact that it took until the 27th day shows you why **patience and a long-term perspective are crucial to give the power of compounding the opportunity to work for you.**

**Compounding works like magic for investing, but also for other aspects in life.**

When you get 1% better every single day for a year, your yearly growth would be equal to 37.7x.

**Not convinced yet about the power of compounding? Here are a few other examples:**

If you would invest $1 per day for 200 years at 7% per year, you would have more than $6 billion (!) dollar

When you put 1 grain on the first square of a chessboard, and double it on each square until the 64th one, you would have 1.4 trillion metric tons of rice. This is more than 2000x the global production of wheat per year

The cost of Columbus’ journey in 1492 was approximately $30.000. When this $30.000 would have been invested until today at 4% per year, it would be worth more than $33,000,000,000,000 ($33 trillion)!

# Compounding explained

**You’ve already learned that compound interest is the eighth wonder of the world.**

**Compounding works like a snowball.** It starts very slow, but the longer you keep rolling, the bigger it gets.

**Let’s say that you invest $10,000 and you are able to compound your money at 7% per year.**

In year 1, you’ll make $700 ($10,000 * 7%). As a result, the value of your portfolio is equal to $10,700.

**In year 2, you’ll make more than $700.** Why? **Because you also make money on the $700 you earned the year before**. As a result, you’ll make $749 ($10,700 * 7%) in year 2 and the value of your portfolio increases to $11,449.

**After 10 years, you’ll even make $1,286.92 (!). This is almost twice as much as in the first year.**

**When you would invest for very long periods of time (> 20 years), something magical happens.**

Remember that you made $700 in year 1 and $1,286.92 in year 10.

**Here’s what happens if you keep investing:**

In year 20, your yearly profit will increase to $2,531.57

In year 30, your yearly profit will increase to $4,979.98

In year 40, your yearly profit will increase to $9,796.37

In year 50, your yearly profit will increase to $19,270.95

**If you would keep your $10,000 investment for 50 years, your investment would almost be worth $300,000! **

Furthermore, **your yearly profit of $19,270.95 would almost be twice as much as what you invested in the first place.**

# Formula compound interest

On the internet, there are a lot of **compound interest calculators you can use**. The Calculator Site is a good example.

Here’s an example where you would invest $10,000 at 9% per year for 40 years while adding $200 per month to your investment account (total investment of $106,000 over 40 years).

**When you would do this, you would have $1.3 million after 40 years, as you can see here:**

Obviously, you can also calculate it yourself.

**Here is the formula for compound interest:**

Final amount = beginning amount * (1 + yearly return)^number of periods

If you would invest $10,000 for 20 years at a yearly return of 9%, it would look as follows:

Final amount = $10,000 * (1,09)^20

Final amount = $56,044

**In the table below, you can find out how many times your wealth compounds at various combinations of yearly returns and years**.

When you can for example achieve a yearly return of 12% for 30 years, your money will increase 30-fold (!).

# Start as early as possible

You’ve learned that the longer you can compound your money, the better.

**This also means that the sooner you start investing, the longer compounding can work like magic for you.**

**Let’s use an example to make this even more clear. **

**In our example we have 2 men who start investing:**

**Ben**Starts investing at age 21

Monthly investment: $200

Stops contributing money at age 30 (added money to his account for 9 years)

**Joey**Starts investing at age 30

Monthly investment: $200

Keeps investing until age 67 (added money to his account for 37 years)

In total, Ben will have contributed $21,600 while Joey will have contributed $88,800 to their investment account.

When Ben and Joey both keep their investment until age 67 and manage to compound at an average annual return of 11%, **Ben would have $2.1 million while Joey would have grown his account to $1.2 million.**

**This means that Ben would have almost twice as much money as Joey while he contributed only one-fourth of what Joey contributed!**

# Never interrupt compounding

Charlie Munger once said that **the first rule of compounding is to never interrupt it unnecessarily.**

You don’t believe Charlie?

**You should. Let’s use one more example:**

**Olivier**Starts investing at age 21

Monthly investment: $200

Emma

Starts investing at age 21

Monthly investments: $200

Stops investing at age 30 and starts again at age 40

**This is how their wealth would like if they both keep investing until age 67 and achieve a yearly return of 11%:**

Olivier: $3,3 million

Emma: $1,1 million

As you can see, **Olivier would have 3 times as much money as Emma just b**e**cause Emma decided to stop investing for 10 years.**

# Conclusion

**That’s it for today. Here’s what you should remember:**

Compound interest is the eight wonder of the world

Start investing as early as possible

You can calculate compound interest via this formula:

Final amount = beginning amount * (1 + yearly return)^number of periods

Never interrupt compounding unnecessarily

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# About the author

Compounding Quality is a professional investor which manages a worldwide equity fund with more than $150 million in Assets Under Management. We have read over 500 investment books and spend more than 50 hours per week researching stocks.

CQ, my son turns 16 at the end of the month. Recently, he started to express great interest in investing, the economy, how to start and run a business and so on.

This marvelous article would be a great motivation for my boy to continue reading and learning. I keep telling him that his greatest advantage is to be able to start saving and investing at an early age. Time will be on his side, if he grows to be a man of patience and shrewdness.

Thank you and have a great Easter!

Thanks! Was really helpful