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How Compounding Work: How investors Can Cut the Cost of Workplace Drama, End Entitlements, and Achieve Big Results
How Compounding investors Can Cut the Cost of Workplace Drama, End Entitlements, and Achieve Big Results
About This
Compounding is what happens when you take a number and increase it over and over again by a percentage (think “10% annual growth”). That’s opposed to increasing it by a fixed number (think “add 10 each year”).
To demonstrate how the mathemagical phenomenon of compounding works, let’s use a delicious lattes. (ICYMI, we’re here at Ellevest.)
OK, say you drink 100 lattes a month. That would be a highly concerning caffeine level, but we’re trying to make the math easy here. So one day, your fairy frothmother shows up and tells you that she is granting your That milky (or soy milky or oat milky) goodness will increase by 10% every month.
OK, so 10% of 100 lattes is 10 more lattes, right? Right. So here’s how you might assume that would
Month 0 (when you start): 100
Month 1: 100 + 10 = 110
Month 2: 100 + 10 + 10 = 120
Month 3: 100 + 10 + 10 + 10 = 130
Month 4: 100 + 10 + 10 + 10 + 10 = 140
Month 5: 100 + 10 + 10 + 10 + 10 + 10 = 150
Total extra lattes after 5 50
But that’s not actually how compounding works. You don’t just get an additional 10% of your original 100 lattes every month. Instead, you get an additional 10% of your total number of lattes every month (rounded below because who wants only part of a latte?):
Month 0 (when you start): 100
Month 1: 100 + (100 x 10%) = 110
Month 2: 110 + (110 x 10%) = 121
Month 3: 121 + (121 x 10%) = 133
Month 4: 133 + (133 x 10%) = 146
Month 5: 146 + (146 x 10%) = 161
Total extra lattes after 5 61
Boom. When the number is compounded, you end up with more coffee in the end. That’s the magic. (Very high-energy magic.)
Grab This Book For Deep Learning about Investing Tips and Tricks
About This
Compounding is what happens when you take a number and increase it over and over again by a percentage (think “10% annual growth”). That’s opposed to increasing it by a fixed number (think “add 10 each year”).
To demonstrate how the mathemagical phenomenon of compounding works, let’s use a delicious lattes. (ICYMI, we’re here at Ellevest.)
OK, say you drink 100 lattes a month. That would be a highly concerning caffeine level, but we’re trying to make the math easy here. So one day, your fairy frothmother shows up and tells you that she is granting your That milky (or soy milky or oat milky) goodness will increase by 10% every month.
OK, so 10% of 100 lattes is 10 more lattes, right? Right. So here’s how you might assume that would
Month 0 (when you start): 100
Month 1: 100 + 10 = 110
Month 2: 100 + 10 + 10 = 120
Month 3: 100 + 10 + 10 + 10 = 130
Month 4: 100 + 10 + 10 + 10 + 10 = 140
Month 5: 100 + 10 + 10 + 10 + 10 + 10 = 150
Total extra lattes after 5 50
But that’s not actually how compounding works. You don’t just get an additional 10% of your original 100 lattes every month. Instead, you get an additional 10% of your total number of lattes every month (rounded below because who wants only part of a latte?):
Month 0 (when you start): 100
Month 1: 100 + (100 x 10%) = 110
Month 2: 110 + (110 x 10%) = 121
Month 3: 121 + (121 x 10%) = 133
Month 4: 133 + (133 x 10%) = 146
Month 5: 146 + (146 x 10%) = 161
Total extra lattes after 5 61
Boom. When the number is compounded, you end up with more coffee in the end. That’s the magic. (Very high-energy magic.)
Grab This Book For Deep Learning about Investing Tips and Tricks
148 pages, Kindle Edition
Published July 10, 2022
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