Compounding is the most powerful force in finance

Albert Einstein is said to have called it “the greatest mathematical discovery of all time”. And it’s probably helped more people build wealth than all the other investment strategies in the world put together.

Compounding is a simple idea… in short, it means reinvesting returns instead of spending them. Over time, the original investment gets bigger and bigger as more returns are reinvested.

It’s like a snowball rolling down a hill. The further it rolls… the bigger it gets.

For example, if I invest $10,000 with an annual interest rate of 5 percent… after 12 months I’d get $500 in interest. But instead of spending that $500, I reinvest it on the same terms… now I’m earning 5 percent on $10,500. So 12 months later I’d receive $525 in interest, which I again reinvest… and on it goes.

Just like a snowball, the investment is getting bigger every year. And I’m earning interest on top of interest.

In the short term, that doesn’t sound like a lot. But now look at the magic of compounding over several decades… and the more decades, the better.

If I started investing when I was 25 years old with an annual investment of $20,000 (and I reinvested the interest each time) at 65, I’d be sitting on a nest egg of about $2.5 million.

But if instead I’d started investing the same sum each year, on the same terms, at 35 (rather than 25), I’d have about $1.1 million less when I retired – because compounding has had less time to work its magic, as the graph below shows. That’s a huge difference.

So when it comes to compounding… time is the secret to success. Starting as soon as possible and reinvesting interest over several decades can build life-changing wealth.

What is the Next Step?

When it comes to investments and financial planning we will be able to answer any questions you have and advise you on the best way to proceed, in what can be a complex area.

Contact us today and one of our experienced advisors will be happy to assist.

About Expat Financial

Expat Financial is a team of highly experienced Hong Kong based Financial Advisors. As Expats ourselves we understand the challenges of living and working in a foreign country. We use our Expat experience along with our extensive financial expertise to help you maximise the benefits of working and living offshore.

Regardless of whether you’re a financial novice or a seasoned investor we specialise in helping you to achieve your goals.

Additional Information Resources

Additional information resources are available by clicking on the links below:

• Financial Planning
• Investments 
• Insurance 
• Pensions
• Tools & Calculators
• News