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What Is 'Compounding'?

Compounding is the Accumulation of gains over time. Compounding is important because it creates the possibility of huge gains in a short period of time. By reinvesting the revenue your business generates over and over,  you can multiply your original investment many times.

Accumulating gains will produce huge results. The trick is to be patient.

Josh Kaufman Explains 'Compounding'

Here's a sure-fire way to become a millionaire: save $10 a day for 40 years in a way that earns 8% interest.

Saving $10 a day isn't difficult-you can save $300 a month by eliminating unnecessary expenses and earn 8% by investing that money simply and conservatively. (I recommend Fail-Safe Investing by Harry Browne and I Will Teach You To Be Rich by Ramit Sethi if you're interested in specific, low-risk investment strategies.)

Here's what's even more amazing: you'll only contribute $146,110 over that forty-year span. How, then, do you end up with over a million dollars?

Compounding is the Accumulation of gains over time. Whenever you're able to re-invest gains, your investment will built upon itself exponentially-a positive Feedback Loop (discussed later).

A simple example of Compounding is a savings account.

Let's say your bank account earns 5% interest. After a year, $1 in your bank account is going to be worth $1.05. In year two, you don't start with $1-you start with $1.05. In year three, you'll have $1.10. In year four, you'll have $1.15. Fourteen years later after you make the initial deposit, you'll have $2.

That doesn't sound like much until you consider that this relationship Scales. If you start with $1 million, you'll have $2 million after fourteen years. Not bad at all.

Compounding is important because it creates the possibility of huge gains in surprisingly short periods of time. If you re-invest the revenue your business generates and your business is growing rapidly, you can multiply your original investment many times over.

Compounding is the secret that explains how small companies become large companies in a matter of a few short years. Accumulating gains inevitably produces huge results over time.

The trick is to be patient enough to wait for the reward.

Questions About 'Compounding'

• Are you reinvesting your returns?
• How quickly is your investment growing?
• How can you take advantage of the magic of compounding?

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"Improve by 1% a day, and in just 70 days, you're twice as good."

Alan Weiss, management consultant and author of Getting Started in Consulting and Million Dollar Consulting

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