The Power of Compounding

The Power of Compounding

The proverb ‘the early bird catches the worm’ is not only true to work but also when it comes to investing. Most people prefer instant gratification especially if they worked really hard for that money. They need to instantly gratify themselves in order to savor the rewards of their hard work.

One of the ways to instantly gratify one’s self is shopping. With the rise of e-commerce nowadays, it has become more convenient. In just a few clicks of the mouse and an internet connection, you could purchase the things that you want and have it delivered at your doorstep without the hassle of going to the physical stores of retailers.

However, if you prefer to delay your gratification, and you choose instead to save and invest, then you are on the right path towards financial freedom.

I was recently featured in ANC ‘On The Money’ for the second time and I discussed the power of compounding. Compounding, in investing, is simply the interest of an interest. We commonly hear it when we have our savings park in the bank and watch it grow as time passes by. However, compounding is not always beneficial for us and this is true especially if you have loans left unpaid.

Credit cards are known to be the easiest sources of debts. Like any other unpaid loans, it would incur interest and penalties if left unpaid at a staggering 3.5% monthly. This compounding interest rate will drown you into mounts of debt. Time will be against your side if you have unpaid interest-bearing debts.

In contrast, if you are an investor, time will be your friend when it comes to compounding. The earlier you started investing, the more the potential for your money to grow. This is clearly seen on the image below.

Using a fixed 10% compound annual interest rate, a person who started investing Php 5,000 at an early age of 25 and kept investing for 10 years would have Php 20 million by the time he reached the retirement age of 65. Using the same scenario but at different starting age of 35 which is 10 years later than the first, the person would only have Php 7 million by the time he reached the retirement age of 65.  That’s the opportunity loss, a difference of Php 12.4 million in just a span of 10 years of being late to invest.

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Do you want to become a millionaire? The power of compounding works to your advantage. The earlier you started investing, the earlier you will achieve your millionaire status. The table below shows the amount you need to save monthly at given age and interest rates in order to become a millionaire at the retirement age of 65.

Notice that the younger you are, the lower the amount you need to invest monthly. Conversely, the older you are, the higher the amount you need to invest monthly because you are running out of time already.

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True enough, the early bird catches the worm. It’s not how much you earn but how much you save and invest. If you are the ‘early bird’ in investing, then you would catch the ‘worm’ sooner than the rest of your peers.

Watch my ANC “ON THE MONEY” TV Guesting below for this topic:

Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

10 responses on “The Power of Compounding

  1. Good day!!!
    You showed in the table above how much to save monthly in order to achieve the desired amount upon retirement.
    My question is what bank or where can you suggest that gives the higher yield upon retirement.
    And please further elaborate the table above example age 50. What do you mean by 10%, 8%, 6%, 4% and 2% and the amount corresponding.
    Thank you and regards.

    • It means the needed money to save or invest to get a million on the year you reach 65. If you’re 40 now you need 2,567.60 if the interest rate is 2%

    • Approximately yes, consistently investing 50k a month for 10 years. However, the example used a fixed 10% compound annual interest rate.

      In reality, it would be hard to find an investment with a ‘guaranteed’ fixed interest rate of 10% per year. Equity funds of both mutual funds and UITFs which invest in the stock market can have gains as much as 10% or more but it’s NOT guaranteed.

      What the article tells us is that saving and investing at an early age can have a powerful impact on the returns since compound interest uses time as its ally to grow investors’ money over time.

  2. i started investing in a mutual fund since december 2013 with P3000.00/month at 3.75% quarterly compounded interest, i made it 5k/monthly on 2014 and 7k/monthly this 2015 with the same rate of interest and happy to know that my investment is growing fast and i religiously do saving and investing at the same time because comparing to regular savings at my bank it was overpowered by inflation rate.

    my target is atleast 1M at 2025

  3. @ Gustavo and Ian: You can invest in equity funds of both mutual funds and UITFs. These funds invest in the stock market. However, before you invest, make sure you have emergency fund first that you can use in times of emergencies as investment involves time to grow your money.

    What you don’t want to do is to pull out your money even if it’s losing because you need it for emergency purposes that is why it is important to set up an emergency fund first before you start investing.

  4. Dear Tyrone,

    I’m following your FB page, since then I saw you in the ANC on Money, followed by Jessica Soho as series of interviewed.

    Anyways, I have started to invest in since 2011, but in VUL in Manulife (Balanced fund, Equity Fund, I forgot the other one) let’s say around 375k to be exact with the different allocations. Do you think this is okay? I have already Insurance (term insurance and life insurance).

    In 2014, I start to invest in UITF at BDO (Equity and Sustainable Fund) 100k only, considering the economy right now, do you think it will grow more after 5years.

    Now, I’m planning to invest in Mutual Fund, can you please suggest what company do I have to go, considering compounding interest is there, I’ve heard Bo Sanchez and Colayco, Citiseconline too,…

    Please I need your advise…

    Thank you – Mary –

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