In the retirement industry we see it repeatedly. An employee works hard saving for retirement and then has an event take place and all the work saving for the future crashes. Take for example someone that works 5 years at their employer and accumulates $20k in their 401(k). At that 5-year mark they decide to take a job at another organization and here comes the tipping point. Do I roll this $20k into my new employer’s 401(k) plan or should I just take the money and enjoy life a little more? That $20k may buy a memorable vacation or go towards a well-deserved vehicle upgrade. What’s the hurt taking this money? Especially if this person is only 28 years old – there’s plenty of time to build up a retirement account. Right?
Now comes the lesson of the power of compounding. If you have $20k at 28 that’s originally intended to be for retirement, how much would you expect that $20k to potentially grow to become? Even with no other contributions, assuming a 7% rate of return, the answer is just under $250k by age 65. Just one decision that seems very minor in the moment at age 28 can become a $250k decision for retirement.
The magic demonstrated growing from $20k to $250k is in big part due to compounding interest, also referred to as the 8th wonder of the world by Albert Einstein. Time is this 28-year old’s best friend where not just the $20k shows return but all the earnings each year continue to increase the returns in future years – the power of compounding. This 8th wonder of the world shines a light on the impact time can have when we put in the work early. Let’s take a couple minutes to explore what Einstein’s view of the 8th wonder of the world can teach us about our personal growth journey?
Start now:
In our example, $20k at age 28 can grow to nearly $250k at age 65. If you delay just 10 years and that $20k is at age 38, do you realize you basically cut that number in half at age 65 to around $125k? Age 48 continues to showcase how important time is as this $20k at age 48 would only grow to just over $60k at age 65.
We’ve all heard the saying that time is the most valuable thing anyone can have. It’s true for multiple reasons. One of the reasons we don’t always think about is the more time we have to practice and build on something that’s learned, the more opportunity we can accel at it (just as the more time the money stays in the market, generally speaking the more opportunity there is for growth). If you’re interested in something or want to learn more about a topic, don’t wait. Start digging and uncovering knowledge and insights now so that you have more time to use this information to build for the future.
Consistency is key:
The reason the $20k would grow to $250k is this money stays in the market – both the initial investment and the interest accumulated over time. The money is consistently in the market for the return on investment to impact the value of the retirement account.
Same with how we need to keep pushing consistency in our growth. When we’re willing to consistently build on what we know now and keep searching for more education and insights where we want to grow, our moments of growth will build on one another. For us to see our growth compound, consistency embracing and building on our moments of growth and remaining engaged with the process can drive huge gains of progress.
Big swings up and down will happen:
When we invest in the long-term, we’re going to see big swings. On March 16, 2020, we saw the S&P 500 drop nearly 12% in only one day. On October 13, 2008, we saw a nearly 12% increase in this single day of market activity. The market can see huge swings when short-term analysis is done.
There will always be huge swings up and down in our journey of growth. The key is to withstand these drastic changes up and down in the short term. We must invest in the long-term and understand that while there may be some highs and lows, remaining on the path of progress forward for sustainable success is the key. Don’t get caught trying to find big short-term gains that are full of traps. Building for the long-term is where the path to discovering what we’re capable of lies.
Take your step: compounding happens when we start early and consistently devote time and energy in where we’re growing. One of the most important things you can do is get started now. There will always be reasons to postpone your journey getting fit, striving for a new position you’re passionate about, giving back to your community, or any other way you’re striving for a better future. Starting now allows the compounding to start working its magic. The power of compounding starts slow but keep reminding yourself you’re here to play the long-term success game so start now and watch the magic of compounding continue to build over time.