Compounding relates to the exponential effect of letting the returns on any investment stay invested at the same rate of return i.e. not taken out and spent. The end result over time seems magical.
Albert Einstein called compound interest the 8th wonder of the world.
Just say you made a $10,000 investment that gave an annual 10% return – that’s $1000
| 1 year – Now you have $11,000 invested at 10% and that gives you another $1,100. |
| 2 years – Now you have $12,100 invested at 10% and that gives you another $1,210 |
| 3 years – Now you have $13,310 invested at 10% and that gives you another $1,331 |
| 4 years – Now you have $14,641 invested at 10% and that gives you another $1,464 |
| 5 years – Now you have $16,105 invested at 10% and that gives you another $1,610 |
| 6 years – Now you have $17,715 invested at 10% and that gives you another $1,771 |
| 7 years – Now you have $19,488 invested at 10% and that gives you another $1,949 |
Notice that the $1949 return in year 7 is actually 19.49% of the $10,000 you started with, and you put no more money into the investment and made no effort.
And this is just the start. It seems fairly slow at the start but becomes very powerful over time. Now look how your investment grows over a longer time period (in round figures).
| Investment | $10,000 |
| After 7 years | $20,000 |
| After 14 years | $40,000 |
| After 21 years | $80,000 |
| After 28 years | $160,000 |
| After 35 years | $320,000 |
| After 42 years | $640,000 |
(that’s right, a $320,000 gain over the final seven year period on an original $10,000 investment)
Growth in the last time period is always greater than all the previous time periods combined. The gain in the last 7 year time period is $320,000 and that is more than the $310,000 gains from all the previous time periods combined. Now that is powerful.
Now even more powerful is if we don’t start with a mere $10,000 investment. Say we use a $500,000 piece of real estate with the traditional 10% capital gains seen over all time in Australia’s capital cities. “Deal in pennies, you make pennies; deal in pounds, you make pounds”.
| Property Investment | $500,000 |
| After 7 years | $1,000,000 |
| After 14 years | $2,000,000 |
| After 21 years | $4,000,000 |
| After 28 years | $8,000,000 |
| After 35 years | $16,000,000 |
| After 42 years | $32,000,000 |
What we have left out so far is the fact that properties have rental incomes and tax rebates that would pay off the above property and many, many more properties over that time period. And rent from those “other properties” would exponentially pay off many more “other properties”…..on and on it goes.
That’s what the magic of compounding can do.
We know that these figures look silly in the present time, just as today’s property values looked unbelievable decades ago. However this is exactly what always happens over time.
In 1970 when average houses in Brisbane were selling for $11,000, who would have believed the same houses would be worth $433,000 in 2012, 42 years later. That’s a 40 fold increase. You can pick any 42 year period and the same phenomena applies.
Teaching people to compound their assets and to have the rents and other passive cash flows pay them off quickly are the tools of trade for Canterbury.
We can quickly explain it to you in more detail.