The Power of Compounding
Compounding is really a basic term that we encounter in our day to day life. It doesn't take a scientist or a financial expert to explain correctly what compounding means. This is what growing money means. Compounding will ensure that your $1 today will be worth more tomorrow and even more the day after.
A simple illustration:
You invest $100 in a financial instrument called bank deposits. It promises 1% interest every year and they pay at the end of each year.
End of the year we will all celebrate the welcome the new year, and at this time, the bank pays you $1 on your $100 (1% of $100 = $1), and they too, went on to celebrate their bonus for the year. So being somemore who haven't used a single cent in that account, you have $101.
One more year and the whole cycle repeats itself. You are still happy and nothing changes except for your account. The bank is sad cos they have to pay you $1.01 for interest this time. You have $102.01!
Of course, I am using this example to mock at you for leaving that $100 in the bank since he doesn't withdraw it to use. He can put it into a better purpose called investing.
Now suppose the returns (interest) is 10% instead of 1%. End of year 1 will be $110 instead of $101, and end of year 2 will be $121 instead of $101.10. You decide for yourself which one is more.
From today onwards, after celebrating the enterance of year 2010, I will be sharing something every week, be it investment knowledge, study advice or whatever nonsense. But I am good at none of these.
Compounding is really a basic term that we encounter in our day to day life. It doesn't take a scientist or a financial expert to explain correctly what compounding means. This is what growing money means. Compounding will ensure that your $1 today will be worth more tomorrow and even more the day after.
A simple illustration:
You invest $100 in a financial instrument called bank deposits. It promises 1% interest every year and they pay at the end of each year.
End of the year we will all celebrate the welcome the new year, and at this time, the bank pays you $1 on your $100 (1% of $100 = $1), and they too, went on to celebrate their bonus for the year. So being somemore who haven't used a single cent in that account, you have $101.
One more year and the whole cycle repeats itself. You are still happy and nothing changes except for your account. The bank is sad cos they have to pay you $1.01 for interest this time. You have $102.01!
Of course, I am using this example to mock at you for leaving that $100 in the bank since he doesn't withdraw it to use. He can put it into a better purpose called investing.
Now suppose the returns (interest) is 10% instead of 1%. End of year 1 will be $110 instead of $101, and end of year 2 will be $121 instead of $101.10. You decide for yourself which one is more.
From today onwards, after celebrating the enterance of year 2010, I will be sharing something every week, be it investment knowledge, study advice or whatever nonsense. But I am good at none of these.
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