Compounding Returns

"The Eighth Wonder of the World"

Albert Einstein once said, “Compounding interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.

There is a magic to investing that many people never learn. Unfortunately, this usually results in mediocre financial success at best. In fact, about 97% of all workers never accumulate enough money to be financially independent. In retirement, they are destined to rely heavily on Social Security and modest savings, usually from a company retirement plan.

There is a better way. If you learn and implement the magic of compounding returns, you can join the “3% Club”, that small group of people who create massive financial success for themselves. Here is what you need to know about systematic investing:

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How Compounding Interest Works

Most people think of systematic investing in linear terms meaning they see money growing in a straight line.









Because of compounding, instead of a straight line, the growth line curves upward. This is because you earn interest on your deposits, and you earn interest on your interest.









In the beginning, the discipline of systematic investing matters most. But as you reach the POWER CURVE, returns matter most. In this example, using a 10% rate of return assumption, notice it takes eight years to get to 1 to 1…meaning your earnings on your money is equal to your annual investment. As you move into the POWER CURVE, in only takes four more years to get to 2 to 1; then three years to get to three to 1; and two years to get to four to 1…thus, the power of compounding returns.













The Big Takeaway

While market rate of returns can vary, a diversified portfolio of investments has a proven track record of success over the long term. The key is to start your systematic investment program early, continue to make the contributions, and let TIME work its magic. Contact a your financial professional to discuss circumstances surrounding your unique situation. 




Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States.  He is the author or co-author of six books, including 50 Rules of SuccessJ.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaireand 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch GroupConsult your financial advisor before acting on comments in this article.


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