The Power of Compounding

Many people become intimidated when they think about the amount of money they have to save for emergencies, retirement, college and any other long-term, high-cost goals. And while it’s understandable to feel overwhelmed by these goals, it’s important not to get discouraged because through the power of compounding interest, you may find the process easier than you expect.

What is Compounding?
When you save money in a CD, money market or savings account, and even some stocks, you earn interest on what you’ve saved. That interest is added to the account balance and then the next time interest is calculated, it’s based on the increased value of your account. In effect, you earn interest on your interest that you earned in prior months and years. And you keep earning interest on that interest for as long as it remains in the account. Many people understand this concept, however, don’t fully appreciate the impact that compounded earnings can have, especially over a long period of time.

An Example of Compounding

Here is an example of the effect of compounding. If you invested $5000 annually at the end of each year over a period of 30 years, you would have invested a total of $150,000. However, if it grew at 6% annually, because of compounding, after 30 years, you would have over $395,000!

Effect of compounding image

In Compounding—Time Matters
One of the biggest assets you have when you plan to leverage the power of compounding is time. The longer you allow your money to grow and your interest to compound, the more money you’ll earn. But that also means there’s a price to be paid when you wait.

Investment Fundamentals

This graphic shows how much impact time has on your investments. This shows three different portfolios- all three invested $3,000 per year until age 66 and all three grew at 6% per year. The only difference was that the blue portfolio started at age 20, and green portfolio waited to age 35, and the purple portfolio started investing at age 45. Yes, the blue portfolio invested by the 20-year-old had more years to put aside money, but they only invested $75,000 more than the person who started at age 45 in purple. Yet, they ended up with almost $560,000 MORE than the purple portfolio by age 66. That is the power of compounding over time.

Luckily, it’s never too late to gain interest and growth through compounding so don’t be discouraged. We are just simply trying to illustrate the importance of acting sooner rather than later. At Kramer Wealth Managers, we want to help you leverage the power of compounding as part of your Wealth Path. Contact us today so we can help you get started.

Content provided by Broadridge Investor Communication Solutions, Inc.

Adrianna Rocha

Client Relations Specialist

240-379-6929 V
240-439-6889 VP
512-379-6909 FAX

Adrianna Rocha joined Kramer Wealth Managers in 2021.

Adrianna is responsible for client experiences and service. As part of the customer service team, she strives to help and provide top-notch service to our clients. As part of her role, she communicates with clients through videophone, schedules client meetings, prepares and processes forms, and gathers information for our advisors.

Adrianna Rocha graduated with a Bachelor of Arts in Communication Studies from Gallaudet University in 2017. Before she joined our team, she worked in the customer service industry for nearly a decade. She excels in human-to-human relations and takes pride in not only her own accomplishments, but her clients’ as well. Adrianna enjoys chatting about her slight obsession with dogs, houseplants, essential oils, and food: especially Mexican food! She is also a proud fur-mama to her beautiful Aussie-mixed pup, Ziva.

Adrianna is not registered with Osaic Wealth.