The Power of Compounding

This weekend, I traveled to Colorado on business and spent most of my time reading Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe. The entire trip, I kept thinking about how important the early decisions one makes in their life are to their financial well being. Consider that if you had a child and, on the day they were born, began investing $150 into a group of common stocks for them every two weeks until the time they retired at 65 (assuming your progeny took over the responsibility of funding the account at some point along the way), they would end up with $47,426,175.

Most people don't believe it; they think there's some sort of magic or that you would have to win the lottery to have that kind of capital, but it's simply not true. When you do understand this, the knowledge can change your life. Case in point: A good friend of mine back from my undergraduate years of college paid for her entire education through a trust fund set up by her grandfather. The unique thing? Her grandfather was a young man just out of the military with only a few thousand dollars to invest. Yet, he understood that he could change the course of his family's history by looking beyond his own lifetime. Today, each of the grandchildren have several hundred thousand dollars in an account.

You can grow that rich if you start young, compound long enough, earn a decent rate of return, and continue to put aside ever-increasing amounts of cash for investment. Einstein was correct; the power of compounding really is the eighth wonder of the world.