It’s financial literacy month, celebrated each April since 2003 to promote economic and financial education in the U.S. We’re honoring the month with information about compounding interest, one of the most important concepts to understand since it can have a major impact on your investment portfolio.
Often misunderstood, yet critically important
Many investors don’t fully comprehend the power of compounding interest and the impact starting early can have. Compound interest is interest paid on your principal plus your accumulated interest. Since you earn interest on your interest, your money grows exponentially.
Would you choose $10,000 a day or a penny that doubles every day for a month?
At first glance, it may seem that $10,000 a day for 30 days would be the better option. This would yield $10,000 x 30 (in a month with 30 days) for a total of $300,000. But the chart below shows what you would get if you choose the penny.
With compounding interest, time is of the essence
Although investments don’t double in value every day in a month like the magic penny, compounding interest can significantly impact your investment portfolio. The bar graph, below, compares the value of an initial $100,000 investment made in years 0, 10 and 20 demonstrating the value compounding interest can have over time. In this example, the investor who realized 30 years of compounded investment returns ends up with almost $930,000 more than the investor who only invested for 10 years.
Luma Wealth supports financial literacy
At Luma Wealth, we’re always interested in promoting financial literacy and empowering clients with the fundamentals about investing and wealth planning. We host a series of client events throughout the year, including our popular Solutions for Women and our new, and more topical, Fireside Chats.
* 2017 Fundamentals for Investors, Chart titled: A Diversified Portfolio: Sum of the Parts ©2017 Morningstar, Inc.