One of the biggest (and most fun) parts of our job over the years has been educating savers about the power of compounding. We’ve written a bit about this here before and talked about the “rule of 72” as a way to illustrate how powerful compounding is over a period of years. A recent article in the Journal of Financial Planning puts a small twist on this, breaking the curve caused by compound interest into two parts, an early period when the growth of wealth isn’t very noticeable and a later part when the compounding effect becomes much more dramatic.
It’s easy for younger savers and investors to get a bit discouraged in the early years of their investing program. The increase in their account value isn’t changed an awful lot by the earnings in the beginning. But as time goes on this powerful effect becomes much more noticeable!