Compounding Returns Lead to an Earlier Retirement
If you start early enough, compounding returns can lead to a significantly earlier retirement.
How It Works
For example, assume that you put $5,000 aside in a note that’s 12 months gaining a 12% return. At the end of that 12 month period, you will make $600. Instead of paying out that dividend, now invests $5,600 aside in another note yielding 12%. Now you’ve made $672 in addition to the $600 you made just a year ago.
Interest Rate: 12.00%
|Year 1||Year 5=||Year 10||Year 15||Year 20||Capital Gains(Yr 20)|
|COMPOUNDED||$ 5,600.00||$ 8,811.71||$ 15,529.24||$ 27,367.83||$ 48,231.47||$43,231.47|
|PAID OUT DIVIDENDS||$5,600.00||$5,600.00||$5,600.00||$5,600.00||$5,600.00||$12,000.00|
Benefits of Compounded Interest
It’s powerful seeing the difference of compounded interest versus re-investing your initial investment. Moreover, the two options illustrated above are small samples of what you can accomplish. Here are a couple other ways you can maximize your initial investment:
Gain Interest Every. Single. Day.
Additionally, for investors hungry to get their money moving constantly, investment vehicles such as mutual funds, REITs, real estate investment funds, and the like all provide this opportunity. The yearly capital gains illustrated above, mirror what it would look like to have your money working every single day. With your money in motion, you would get to avoid doing any due diligence on the next 12% yielding investment you seek.
Know Your Dividend Options
Note that the examples above are one of many options as an investor. Hence, you decided to pay out only 50% of your gains and reinvested the rest. Right there you have an additional $10,071.35.
Potential Set Backs
Rather, in a perfect world, we can look at the above chart as a building block towards an early retirement. On the other hand, the real world does throw us enough curve balls where this may not be realistic for most people. Therefore, as long as you have enough motivation to at least get your portfolio in a compounded framework, it will set the precedent of your future retirement.
Finally, think about a portfolio that includes multiple investments yielding 12% at $5,000 each. Not only are you going to compound your interest on every single investment, you’re also going to spread risk across different products.
How many years would it take to double your savings? Use the Rule of 72. (Click the link for more information.)