The Power of Compounding

Many individuals understand the power of compound interest. They understand that compound interest means money or interest earned on interest received. That is, if I earn 5 percent interest annually on one dollar, in one year I’ll have $1.05, but in two years, I’ll have $1.1025, not $1.10.

Granted, this may not seem like a lot; and it isn’t. But on several thousand or hundred thousands of dollars it really starts to add up. This post is mainly for those individuals who haven’t heard of this concept or haven’t started utilizing it to their advantage. Mainly, I’m addressing millennials and college students.

Those individuals in the cohort I’m address have one powerful thing on their side: time. We’ve written before on this blog about the power of time and starting to save early. We showed the comparing of someone starting right away either during or right after college and another start 20 years after college – perhaps in their 40s.

The post showed that the individual that started early, ended up having to save less, but earned more in the long run as compared to the late starter – due to starting early and the power of compounding.

So if you’re in college or consider yourself a millennial, consider starting to save today in an IRA, your employer’s 401(k), or a non-qualified investment account. Additionally, there’s also another way to take advantage of compounding – and that is continuing to invest in your human capital.

Investing in your human capital means continuing education such as a designation, advanced degree or personal development through reading books or taking courses in an area of study. This compounding of knowledge can help boost your income which will then allow you to save more and have more both now and for retirement.

To get started, consider exploring your employer’s plan. Try to save at least 10 percent of your gross income, and aim for 15 to 20 percent. The sooner you start and the higher percentage you choose the better. You won’t miss it. From there, consider opening and contributing to an IRA. In addition, explore options that may increase your human capital such as a Master’s Degree, PhD or other coursework.

However, carefully consider if the expense of such a degree or coursework will compound for you. What I mean is it’s important to analyze whether or not the advance degree make sense financially. If the advanced degree will cost five to six figures, but return very little in regards to financial increase, you may consider another route. While I am in favor of education, the last thing an individual wants to do is wind up six figures in debt without a significant financial return on that investment.

Finally, consider giving of your time and resources to others. Your generosity and advice to others compounds in ways you may not see physically (such as monetary or other rewards) but it will reward you holistically and potentially spiritually. After all, is anyone really self-made? I would argue no. They had help from others along their journey – both seen and unseen. And with some luck as well, they were able to make the most of what they were given. So will you; and then it will continue to compound.