Compounding

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A wealthy man was asked if he had seen the seven wonders of the world. He responded, “No, but I do know the eighth wonder of the world—compounding.” It’s important to understand the three variables in compounding: the amount you save, the percentage rate you earn, and the length of time you save.

1.  The Amount

The amount you save depends on your income and spending. We hope you will increase the amount available for saving as you learn God’s way of handling money.

2.  Rate of Return

The second variable is the rate you earn on an investment. The following table demonstrates how an investment of $1,000 a year grows at various rates.

Percent EarnedYear 5Year 10Year 20Year 30Year 40
6%5,97513,97238,99383,802164,048
8%6,33615,64549,423122,346279,781
10%6,71617,53163,003180,943486,851
12%7,11519,65580,699270,293859,142

 

As you can see, an increase in rate has a remarkable effect on the amount accumulated. A two percent increase almost doubles the total over 40 years. But since higher returns usually also carry higher risks, be careful not to shoot for unrealistic returns.

3.  Time

Time is the third factor. Answer this: Who would accumulate more by age 65: Jennifer who started saving $1,000 a year at age 21, saved for eight years, and then completely stopped; or Matt who saved $1,000 a year for 37 years starting at age 29? Both earned 10 percent. Is it Deborah who saved a total of $8,000 or Matt who saved $37,000? Check out the following chart.

DeborahMatt
AgeContributionYear-end ValueContributionYear-end Value
211,0001,10000
221,0002,31000
231,0003,64100
241,0005,10500
251,0006,71600
261,0008,48700
271,00010,43600
281,00012,57900
29013,8371,0001,100
30015,2211,0002,310
31016,7431,0003,641
32018,4171,0005,105
33020,2591,0006,716
34022,2841,0008,487
35024,5131,00010,436
36026,9641,00012,579
37029,6611,00014,937
38032,6271,00017,531
39035,8891,00020,384
40039,4781,00023,523
41043,4261,00026,975
42047,7691,00030,772
43052,5461,00034,950
44057,8001,00039,545
45063,5801,00044,599
46069,9381,00050,159
47076,9321,00056,275
48084,6251,00063,003
49093,0881,00070,403
500103,3971,00078,543
510112,6361,00087,497
520123,8981,00097,347
530136,2901,000108,182
540149,9191,000120,100
550164,9111,000133,210
560181,4021,000147,631
570199,5421,000163,494
580219,4961,000180,943
590241,4461,000200,138
600265,5901,000221,252
610292,1491,000244,477
620321,3641,000270,024
630353,5011,000298,127
640388,8511,000329,039
650427,7361,000363,043
8,00037,000

Incredibly, Deborah accumulated more because of the earlier start. So start saving now!