Albert Einstein once said that Compound interest is the eighth wonder of the world – Why? What makes compounding so amazing that even the great Albert Einstein say such a thing?
To best explain the power of compounding let’s run through an example. Imagine you had $1 today and tomorrow it doubled it to $2 and on day 3 it doubled to $4 so-on-and-so-forth. Where would you be at by day 30?
Let’s take a look..
As you can see it starts off pretty slow, by day 7 you’ve only got $64 to your name and probably thinking “this is just a waste of time”. But time in the market can really supercharge your wealth. Day 11 and it’s already over $1,000.
The best way to explain compounding is the ability for the profits of your initial investment to create more money. I.e. the initial profit makes a profit and keeps building on each other.
How does this relate to property investment?
Think about the classic saying ‘property doubles every 7-10 years’ – whilst this is not true for all areas in Australia, it is for some and truth be told, other areas have outperformed this too. But bring it back to how it all works with property.
Again, best described by an example:
This are not perfect and the expectation that the property market will give you these exact results are unrealistic however there will be ups and downs but as long as the long term trend is up then you can see the affect of compounding.
Another important aspect to note in relation to compounding is the time factor. Patience is key but the later you start the less time you provide fro compounding to work.
For example, those who waited 5 years to begin investing would only be at year 25 (approx. $4.5 Million) Versus $6.4 million – That’s almost a $2 Million difference!
Let Compounding be your friend and it can make an amazing difference to your wealth creation strategy.