Passionate Pursuit of Purpose

Is your money Lazy? (The power of compounding)

Posted by on Jun 27, 2013 in Finding Destiny, Perfect questions, Personal Finance | 2 comments

In Wealth creation pt 1 we discussed the accumulation of bricks of abundance.  In The Power of a Seed we discussed how planting our seed (Asset) produces a harvest.

Compounding: the concept of reinvesting our harvest.  How reinvesting your returns from investments grows your assets.

Here is an example of the basic concept.
You spend $1000 on a bond that  pays 10%/year

Year Year Interest Total Interest Balance
1 $ 100.00 $ 100.00 $ 1,100.00
2 $ 110.00 $ 210.00 $ 1,210.00
3 $ 121.00 $ 331.00 $ 1,331.00
4 $ 133.10 $ 464.10 $ 1,464.10
5 $ 146.41 $ 610.51 $ 1,610.51
6 $ 161.05 $ 771.56 $ 1,771.56
7 $ 177.16 $ 948.72 $ 1,948.72
8 $ 194.87 $ 1,143.59 $ 2,143.59
9 $ 214.36 $ 1,357.95 $ 2,357.95
10 $ 235.79 $ 1,593.74 $ 2,593.74
11 $ 259.37 $ 1,853.12 $ 2,853.12
12 $ 285.31 $ 2,138.43 $ 3,138.43
13 $ 313.84 $ 2,452.27 $ 3,452.27
14 $ 345.23 $ 2,797.50 $ 3,797.50
15 $ 379.75 $ 3,177.25 $ 4,177.25
16 $ 417.72 $ 3,594.97 $ 4,594.97
17 $ 459.50 $ 4,054.47 $ 5,054.47
18 $ 505.45 $ 4,559.92 $ 5,559.92
19 $ 555.99 $ 5,115.91 $ 6,115.91
20 $ 611.59 $ 5,727.50 $ 6,727.50

In 20 years your $1,000 has increased to over $6,700 and you will earn $670 in the next year.  In year one notice it was only $100.  That movement from $100 to $670 is compounding in action.

If you consumed(spent) that $100 each year, you would only earn $100 each year.

In our next example let’s say we invest an average American car payment each month in addition to that initial $1,000 investment. (We are using $350 for car payment as the average ranges from $300 to $550 per month)

Year Year Deposits Year Interest Total Deposits Total Interest Balance
1 $ 4,200.00 $ 324.19 $ 5,200.00 $ 324.19 $ 5,524.19
2 $ 4,200.00 $ 776.61 $ 9,400.00 $ 1,100.79 $ 10,500.79
3 $ 4,200.00 $ 1,274.27 $ 13,600.00 $ 2,375.06 $ 15,975.06
4 $ 4,200.00 $ 1,821.69 $ 17,800.00 $ 4,196.76 $ 21,996.76
5 $ 4,200.00 $ 2,423.86 $ 22,000.00 $ 6,620.62 $ 28,620.62
6 $ 4,200.00 $ 3,086.25 $ 26,200.00 $ 9,706.87 $ 35,906.87
7 $ 4,200.00 $ 3,814.87 $ 30,400.00 $ 13,521.74 $ 43,921.74
8 $ 4,200.00 $ 4,616.36 $ 34,600.00 $ 18,138.11 $ 52,738.11
9 $ 4,200.00 $ 5,498.00 $ 38,800.00 $ 23,636.10 $ 62,436.10
10 $ 4,200.00 $ 6,467.80 $ 43,000.00 $ 30,103.90 $ 73,103.90
11 $ 4,200.00 $ 7,534.58 $ 47,200.00 $ 37,638.48 $ 84,838.48
12 $ 4,200.00 $ 8,708.04 $ 51,400.00 $ 46,346.52 $ 97,746.52
13 $ 4,200.00 $ 9,998.84 $ 55,600.00 $ 56,345.36 $ 111,945.36
14 $ 4,200.00 $ 11,418.72 $ 59,800.00 $ 67,764.08 $ 127,564.08
15 $ 4,200.00 $ 12,980.60 $ 64,000.00 $ 80,744.67 $ 144,744.67
16 $ 4,200.00 $ 14,698.66 $ 68,200.00 $ 95,443.33 $ 163,643.33
17 $ 4,200.00 $ 16,588.52 $ 72,400.00 $ 112,031.85 $ 184,431.85
18 $ 4,200.00 $ 18,667.37 $ 76,600.00 $ 130,699.22 $ 207,299.22
19 $ 4,200.00 $ 20,954.11 $ 80,800.00 $ 151,653.33 $ 232,453.33
20 $ 4,200.00 $ 23,469.52 $ 85,000.00 $ 175,122.85 $ 260,122.85

In this example over 20 years we have invested $85,000 and the current value is over $260,000. Your investment of just $4,200/per year has become a potential income of $23,500 per year.

Here we are compounding our investment by continually adding to it from other sources.  This is the idea behind saving for retirement. You can create your own custom calculation here.  It is a great way to determine how you can get to your desired saving when you enter into retirement.

Now, to really see the amazing power of compounding; let’s change your percentage return.  Instead of mutual funds or bonds, what if we are investing in something with more potential.  Maybe it is an investment, where we combine our money with our energy.  Creating returns of 50% or more.  It is the Power of Seed in action.

What if you average 50%per year on your money and you reinvest that?  Maybe it is flipping houses, flipping cars, making jewelry or clothing.  What is your passion?  If you turned off the T.V. and used your time and talent what could you make?

Let’s take that $1,000 and invest in a “riskier” asset. (In these types of activities the main risks are risk you can control.  This means the risk depends on how wise the investor is).  Could you use $1,000 and find a way to make $500 this year?

Year Year Interest Total Interest Balance
1 $ 500.00 $ 500.00 $ 1,500.00
2 $ 750.00 $ 1,250.00 $ 2,250.00
3 $ 1,125.00 $ 2,375.00 $ 3,375.00
4 $ 1,687.50 $ 4,062.50 $ 5,062.50
5 $ 2,531.25 $ 6,593.75 $ 7,593.75
6 $ 3,796.88 $ 10,390.63 $ 11,390.63
7 $ 5,695.31 $ 16,085.94 $ 17,085.94
8 $ 8,542.97 $ 24,628.91 $ 25,628.91
9 $ 12,814.45 $ 37,443.36 $ 38,443.36
10 $ 19,221.68 $ 56,665.04 $ 57,665.04
11 $ 28,832.52 $ 85,497.56 $ 86,497.56
12 $ 43,248.78 $ 128,746.34 $ 129,746.34
13 $ 64,873.17 $ 193,619.51 $ 194,619.51
14 $ 97,309.75 $ 290,929.26 $ 291,929.26
15 $ 145,964.63 $ 436,893.89 $ 437,893.89
16 $ 218,946.95 $ 655,840.84 $ 656,840.84
17 $ 328,420.42 $ 984,261.25 $ 985,261.25
18 $ 492,630.63 $ 1,476,891.88 $ 1,477,891.88
19 $ 738,945.94 $ 2,215,837.82 $ 2,216,837.82
20 $ 1,108,418.91 $ 3,324,256.73 $ 3,325,256.73

Your $1000 becomes 3.3 million in 20 years…  most likely at some point in this you will need to bring on the energy/time of another person or more.  This is basically concept of how Michael Dell started.  Building computers in his garage and expanding until he was one of the largest computer manufactures in the world.

Tell your Money to get a JOB

A business doesn’t grow in a straight line like our example.   It will have ups and downs.  One business or idea may reach a saturation point.  At that point to earn the large returns; we may have to take the new earnings and find alternative investments or new businesses.

Compounding is the basis of the concept “it takes money to earn money.”  Once you have accumulated those bricks of abundance, your money can work in addition to you working.  Your money doesn’t have to be lazy.  It can have a J-O-B.

What J-O-B does your money have?

Is your money lazy?

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  • Howard

    Sure….compounding is powerful, I’m in total agreement, but find me a safe investment tool today that will give you 10% year in and year out with reasonable risk level please! Check out the the money market interest or CD rates lately? Its something like 0.5%. To me, if the sub-prime crisis didn’t teach us anything, it should have told us that, American’s can’t EXPECT 10% annual interest based on next to zero risk. That is too good to be true! Risk free or low risk investments probably will be around 1-2% and that’s not even taking inflation into consideration.

    • If you consider inflation, you will probably lose real value in those low risk investments right? And some might argue there is substantial risk in U.S. treasuries. So what defines a safe investment?