Power of Compounding

Power of compounding. As some of you may or may not heard of. In simple terms, meaning to reinvest the gain(interest/dividend) from the principle amount which earned and reinvest them again and again. In another words, compounding effect - refers to generating earnings from previous earnings.
One may improvised it, optionally, may choose to periodically deposit the initial same amount of money together with it too.

Let's say initially I had $1,200 to begin with. I gained an dividends of 4% annually from stocks, and I reinvest them with my initially. After the first year, I gained $48, and deposit another $1,200 with it.

After 20 years...

Year	Deposit	Interest	Total
1	$1,200.00		$1,200.00
2	$1,200.00	$48.00	$2,448.00
3	$1,200.00	$97.92	$3,745.92
4	$1,200.00	$149.84	$5,095.76
5	$1,200.00	$203.83	$6,499.59
6	$1,200.00	$259.98	$7,959.57
7	$1,200.00	$318.38	$9,477.95
8	$1,200.00	$379.12	$11,057.07
9	$1,200.00	$442.28	$12,699.35
10	$1,200.00	$507.97	$14,407.33
11	$1,200.00	$576.29	$16,183.62
12	$1,200.00	$647.34	$18,030.97
13	$1,200.00	$721.24	$19,952.21
14	$1,200.00	$798.09	$21,950.29
15	$1,200.00	$878.01	$24,028.31
16	$1,200.00	$961.13	$26,189.44
17	$1,200.00	$1,047.58	$28,437.01
18	$1,200.00	$1,137.48	$30,774.50
19	$1,200.00	$1,230.98	$33,205.48
20	$1,200.00	$1,328.22	$35,733.69
Total	$24,000.00	$11,733.69

After 20 years, I put in $24K, but I have accumulated $11,733.69 dividends, which is 48.89% profits. Free money!!

Not enough? See the power just after 5 more years later.

21	$1,200.00	$1,429.35	$38,363.04
22	$1,200.00	$1,534.52	$41,097.56
23	$1,200.00	$1,643.90	$43,941.47
24	$1,200.00	$1,757.66	$46,899.12
25	$1,200.00	$1,875.96	$49,975.09
Total	$30,000.00	$19,975.09

5 years later, dividends became $19.975.09, 66.58% of free money. What if I continue for 5 more years

26	$1,200.00	$1,999.00	$53,174.09
27	$1,200.00	$2,126.96	$56,501.06
28	$1,200.00	$2,260.04	$59,961.10
29	$1,200.00	$2,398.44	$63,559.54
30	$1,200.00	$2,542.38	$67,301.93
Total	$36,000.00	$31,301.93

After a total of 30 years, you could have $31,301.93 of free money, 86.95%!!

It may took 30 years to have 86.95% profit, sounds too long, but it is only $100 per month and it is free.

If you had started early, another 5 more years to make it 35 years, you would have a return of 110.43%. In another words, you have earned back your principle amount, any thing from there onward is free money of the free money!! The power of compounding gets more powerful at the later stages.

Lastly, the data shows much clearer after it was populated into a graph.


Trust me, I counted that, although there might be slight differences in actual case.

Warren Buffett once said that he wished he had started investment earlier.
Btw, he bought his first stock at 11 years old.
Youth is wealth.