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Unlock the power of compounding

on Tuesday, 05 January 2016. Posted in Opinions

As simple as the theory may seem, compounding can play a key role as you pursue a bright financial future. Compounding, simply put, is when an investment generates earnings on reinvested earnings. When this theory is utilized in retirement accounts, where funds may be accumulated for years or even decades, it can be pretty powerful. Consider the following scenario: An investor receives a sum of $10,000 from an inheritance.

Knowing that he needs to begin saving for his retirement, he decides to contribute the entire amount to an investment vehicle with a 5 percent annual return. During the first year, he earns $500 on that investment, which increases his funds to $10,500. The second year, the interest is accumulated not only on the $10,000, but also on the $500 earned in the prior year, bringing the investor’s funds up to $11,025.

This process would continue for the remainder of the time that the funds stay invested, assuming the same hypothetical return can be achieved. The longer money is left in the account, the faster it may grow, which is a clear indication of the importance of starting a retirement fund as early as possible.

When it comes to investing, procrastinating can be costly. For more information on how the power of compounding can help you pursue your retirement goals, contact an investment professional today. Frank “Buddy” Brand is a Senior Vice President/ Investments with Stifel, Nicolaus & Company, Incorporated, Member SIPC and New York Stock Exchange and can be contacted in the Florence office at 1325 Cherokee Road or by phone at (843) 665-7599 or toll-free at (866) 850-6995.

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