Tony Lepage

One of my favorite activities is calculating compounding returns. I find that it helps stimulate my imagination and think up ways to generate different rates of return. If you’re ever bored I suggest grabbing a piece of paper and compounding your own numbers. Think of what you can afford to invest each month and calculate your return over the first year, second year, and so forth. It gets really exciting around the 8th or 9th year when you generate a larger return than you add to the investment.

The above image assumes you have an investment strategy of investing 15% of your gross annual earnings. It also assumes you can generate 15% return. Further, it assumes you are able to grow your earnings by 4% a year (ie, get a raise).

Over the course of the 31 years (above), a total of $143 861.41 was invested but in the end you have nearly $3 000 000!

I’ve made this excel spreadsheet available here. Simply substitute your own values into the maroon fields (Salary, Invested, Return) and see how you can customize your own plan!

Remember, you don’t need to invest into a stock market to get returns. In fact, one of the best ways to generate a 15% return is to invest in a side business. Not only will doing something you enjoy help you attain a 15% return with a lot more ease, it can also supplement your annual earnings—the beauty is you can start small. With the chart above, you need to attain 15% on $4.5k. That is, you need to make $675.00 and you have $4500 to help you do it.

The most important part of compounding money is TIME. It is essential that you begin today because in later years your money will grow very rapidly. Don’t wait till you’re 60 to enjoy it. Start an aggressive plan when you’re in your 20s and you can retire rich in your 40s.

This strategy holds true even if you have debt. Again, time is on your side, but only if you take advantage of it and compound those dollars. I like to use the following strategy for putting money away and investing:

1. Pay your rent/mortage. This needs to be paid first or else you won’t have a roof over your head. Enough said.
2. Pay yourself next. This is done by investing for your future. Paying yourself second leaves no excuse to not invest.
3. Pay your debts. By paying your debts right before your spending, you’ll want to reduce the debt more by reducing the spending. Investing stays out of the picture and you will grow to despise debt even more.
4. Pay for the present, fun, shopping, etc.

You must begin investing now. It is essential to begin building the habit of investing.

Of course, this was a very simple post but I hope that you are convinced that saving a measly amount of money every month is a great idea. The benefits far outweigh the ability to immediately consume. If you haven’t started an investment plan, I hope you’re motivated now and will begin with the very next paycheck.