The Power of Compounding: Weeds on a Neglected Tomb

Put just a little away. 3 bucks a day over 40 years should result in a million. $3 a day. And you can do better than $3 a day.

Nobody gets rich; everyone can amass wealth.

It is really hard to get rich quickly. Win the lottery or start a fad or star on TV? Good luck with that.

Everyone can amass wealth. You can because of the power of compounding.

First, you have to spend less than you earn and that difference you have to invest. You can’t save in one area then spend in another and amass wealth.

But it has to be invested. Doesn’t take a financial mind at all. Walk into Charles Schwab and tell them you want to open a brokerage account.

Anyone can match the market. Just float with it. Over time the S&P 500 goes up. It climbs a wall of worry over the years and gains about 9.5% a year including dividends. Average. Buy the stock with ticker symbol SPY. Your performance will match the 500 stocks that comprise that index. Almost no expense fee.

You have to get money consistently working for you. Think of it that way. Money working for you, in addition to you working for money.

You will be a very small owner in coffee shops and computer makers and software developers and everything else that you and society consume. While you are at a Saturday ballgame the folks running those companies are working for you. When they are on conference calls responding to an emergency, they are doing your work. Your money is working for you.

If you invest a nice amount every year, then soon- maybe 7 years- you can make more on the growth of your investments annually than you are putting away every year. Let’s say you are saving $4,000 a year. If your investments in year 8 also grow by $4.000, you are starting to see the power of compounding.

25 years from now, and I know that sounds like a lot but it is coming, you will be making more on your investments’ growth than your whole paycheck. Start investing a solid amount now and 25 years from now the growth on your investments annually may very well surpass your paycheck then.

That feels cool.

Use the calculator on your phone and do this. Enter 2,000 then multiply by 2 and again and again and again and again. Multiply 5 separate times. After 35 or 40 years, when your $2,000 doubled 5 times, you would have $64,000. That is from $2,000 invested decades ago.

If you’d invested $3000 instead? $96k.

If you saved $3000 but did not invest it? Bank account?
I don’t even know how to figure that because now banks don’t pay any interest. The money just sort of wallows. So maybe you have about the same amount in 35 or 40 years? But what would $3k buy you. Maybe what $500 does today? A guess, but think of what you got for $3000 back in 1980. Maybe you just think about THAT for a sec.

Getting in and out is stupid. Guys in particular overtrade. His account gets some money, he gets wise and starts trading individual stocks…….bad idea for most. Market timing is supported by enormously complex models with leverage instruments. Buy SPY (or QQQ which tracks the Nasdaq 100). Stay passive. Be an investor.

Or a mutual fund that tracks the S&P 500- Vanguard is a respected company and others too. You can buy them all in your Schwab or TD Ameritrade account. Any brokerage account. Or you can set up an IRA at any of the same places. Do it online. If you are on Linked In, you have all the savvy you need to negotiate a website to buy stock. Its not that hard.

If your next objection is age, consider how old you likely will be. Almost everyone who reads this will live into their eighties. Women- you will live a long time. You still have decades. Either you want to amass wealth or you don’t.

If you are still really young, you don’t actually have to save that much every year. You have the real power of time, but you have to start.
Else you lose the advantage of time!

Reverting to the thought of matching the market, you can also buy stocks that track other indexes. Big cap, small cap, Nasdaq. I just used the S&P as one would struggle to find a better barometer of economic growth.

If you believe the world economically will grow over the decades, the market is the safest place. Safer than cash, eroded by inflation. Bonds I know little of other than low risk low reward. Real estate takes knowledge and time.

Everyone can save pennies, passively follow the market, and amass wealth.

People running active mutual funds struggle to beat the market annually- their frictional costs make it tough. Use them; send their kids to college. Hopefully yours get to go too.

Pros will want to reduce risk- they take your age, subtract it from 100, and tell you to limit your market exposure to that number. But if investing for 20 years from now, that logic is nonsense.

I write my blog as a coaching tool. Good coaches address the whole person when addressing a colleague. I’ve long believed a great step a manager can take with a new employee is ensuring the 401k option is well understood.

The power of compound interest is the greatest force in the universe. (Einstein, maybe) Sock some money away in the S&P 500 and it will grow like weeds on a neglected tomb.