2007-12-02T11:33:00.000+02:00

Compounding

It's not hard to understand what compounding is. Compounding is a pretty simple mathematical feature that may not be obvious before playing around with it a bit to get the feeling of it's essence.

Multiplying any value by 1 means 100% of the value in other words. It's best explained with a few very simple examples:

50 * 1 = 50 (or 100% of 50)
50 * 0,2 = 10 (of 20% of 50)
50 * 1,2 = 60 (or 120% of 50)

If you invest 1000 Swiss franks and are able to make 10% profit in a month, you'll end up with 1100 franks. Thats 1,1 times more than you had (or 110% of initial amount).

A simple example of how it works: take a calculator, insert number 2 and multiply it by 2, then multiply the result by 2 and so forth. The results will be like this:

2
4
8
16
32
64
128
256
512
1024
2048
4096
8192
16384
32768
65536
131072
262144
524288
1048576
and so forth...

This is an extreme example of compounding, but helps to grasp the essence pretty well. Something remotely similar happens if you invest money and keep doing it constantly, profitably and at least for a few years to really start reaping the fruits. Multiplying any amount by greater than 1,0 will result in an exponential growth - not that immense, but strong enough to stop slaving capitalism in a few years' time.

Compounding examples

You invest 1000 euros. You grow your money 5% per month on average. In 5 years' time your monthly profit would be 889 euros and your balance would be 18679 euros.

You invest 1000 euros. You grow your money 10% per month on average. In 5 years' time your monthly profit would be 27680 euros and your balance would be 304481 euros.

Conclusion

If life was that simplistic, everybody would be millionaires, but as always, there are some obstacles on the way to success. These obstacles can be overcome only with PERSISTENCE!

Making Money