If you’re interested in creating wealth, there are 3 fundamental concepts you must understand. These are compounding, assets, and leverage.

Today I’m starting with the foundation – compounding. We’ll dive into the mechanics of how money works, and I’ll show you how it magically creates itself!

Before we get into it, here’s a little pop quiz.

Of the following 3 factors, which one has the biggest impact on your overall nest egg amount?

-The amount of money you have to invest

-Your rate of return

-Amount of time to invest

Most of us think that we *need *a lot of money to create wealth. Or an amazing rate of return. Perhaps it’s just luck…

Well, I’m happy to tell you that none of these are true! While they are important, they aren’t the biggest factor.

**Time **is your greatest asset when it comes to creating more money. Why is this?

**Allow me to share the most magical thing about money! **

It has a natural ability to replicate itself, without any influence from you. It’s called compounding, and as Einstein had said, it’s the “8th wonder of the world”.

**Compounding **refers to money earning more money via interest over time. In order to receive it, you invest in an asset which produces a return, like a stock or a fund.

What makes compounding so powerful is that it’s not a straight line. While our minds typically think about money in a *linear *way, interest is actually generated in a logarithmic manner (when you leave the money in the investment). Compounding *exponentially *increases your return over time, effortlessly.

Same amount of money, same effort. HUGE increase in the result. Compounding is the fairest of unfair advantages!

**Let me give you an example to demonstrate the sheer power of compounding. **

Let’s say you have $1,000, and you find a great investment paying a fixed 10% annual return. You invest your funds for 10 years. After one year, you earn $100 in interest. Every year you receive another $100 in interest. This is called simple interest.

You withdraw the interest each year and spend it – after all, it’s your reward!

By earning $100 each year, after 10 years, you received total interest of $1,000. Your $1,000 became $2,000 (initial investment + total interest). You managed to double your money. Pretty good, right?

However, what would happen if you didn’t withdraw that $100 each year to spend on something relatively small? What if instead you re-invested it alongside your initial starting funds so it *also *makes 10% interest?

At the end of those 10 years, now how much interest would you have received in total?

-$1,159?

-$1,367?

-$1,594?

If you chose $1,594, you are correct! Your initial $1,000 investment just magically became $2,594! (initial investment + total interest).

**You generated an additional 60% without doing anything else**…whether you even thought about the investment or not. And this is only over 10 years. This is called compounding interest.

What would happen if you did this over 20 years?

You’d make almost $6,000 in interest! Now we’re talking!

The difference between 10 years and 20 years is an effortless increase of almost *75%!*

In 20 years, your starter amount of $1,000 becomes $6,728 automatically. You aren’t even contributing any more money past your initial investment (aside from re-investing the annual interest you’re earning).

Over 30 years, the results become even more incredible – you turn $1,000 into $17,449. This is what happens when savings, investing, and time collide. This is the true power of money. It’s magic!

**If you’re not so much of a numbers person, or this feels confusing, stay with me. It’s important to understand this concept – your ability to create wealth depends on it. **

Let’s look at this through two visual examples.

- How much is 1 invested dollar worth over time?

**Chart courtesy of Merrill Lynch Wealth Management. Assumes a 6% annual return.*

*’What you invest’ refers to your initial contribution and ‘what you earn’ refers to the interest earned.*

The answer is it depends *when* you contribute it.

Contributing $1 at age 20 is worth $5.84 at age 65. That means you generated $4.84 in interest on that dollar, for a total return of 83%. Over 45 years, that 6% annual return didn’t stay at 6%, it *grew *to 83%!

But what happens if you start at 55? That same dollar is only worth $1.48 10 years later. You *lose *60%!

The earlier you start the less you need to invest, because compounding does the heavy lifting for you.

2. Is it possible to earn more money by making *lower *contributions and over *less *time?

**Chart courtesy of Merrill Lynch Wealth Management. Assumes a 6% return, and does not factor in taxes or fees.*

The answer is a resounding yes!

In this chart, if you contribute $10,000 a year for just 15 years – from ages 25-40, you will generate over one million dollars at age 65. While the contribution amount is relatively high, it’s the outcome that’s important to look at here. Also, the contribution should include any employer contributions you are entitled to receive from your job.

If you begin 10 years later at age 35, you’d have to contribute that same $10,000 a year for double the time – 30 years, right up until the day you retire – AND you would earn over $200,000 less!

This means you can contribute half the annual amount, and in half the time, yet generate 21% MORE money by starting earlier.

That sentence has a lot to take in.

If you begin saving at 25 vs. 35, you only have to contribute for 15 years to earn over a million dollars by 65. You can stop contributing at 40!

But if you wait 10 years and start at 35, you have to play serious catch up. Now your money has significantly less time to generate itself, so you have to work harder (literally). You won’t be able to produce as much, despite contributing twice the amount of money.

**It’s not about the money you invest! It’s truly the amount of time the investment has to create interest for you. Even at a modest return of 6% a year, you can turn $150,000 into more than one million dollars. **

It needs to be said that these charts are hypothetical simulations. That’s not to say the results aren’t possible, but it does mean the variables are simplified for illustrative purposes. They don’t take into account inflation, taxation, or investment fees, which may lower the results. They also assume a 6% rate of return, which is historically lower than the average return of the stock market, however, past results are not an indicator of future performance.

**CONCLUSION**

I hope this article and these visuals excite you.

If you take only one thing from this article, let it be this:

You don’t have to have huge amounts of money to create a lot of money.

The younger you start, the less money you have to save because you have more time to generate compound interest.

You simply have to know how money works, and begin using it to your advantage *right now!*

PS. You might be wondering what kind of investments produce these returns, and how much you have to learn about them to get these results without taking on too much risk. The answer to this is surprisingly simple, is readily available inside of most financial institutions, and requires very little knowledge! Anyone can learn how to do this with confidence.

PPS. One last caveat. If you are older, it’s not too late for you. You’ll want to take advantage of some other concepts to quantum leap your wealth, like leverage and good debt.

If you’d like help getting started with investing, reach out for a complimentary consultation today.