Create a Money Machine: The Effect of Compounding

Billy Kaderli,

By Billy Kaderli,

Special to the Financial Independence Hub

Our adventures around the world allow us to interact with many younger travelers in cafes and restaurants. Travelers are a great source of information about where they have been, places to stay and where to avoid. Things to do and the best way to get to a destination are often the topics of conversation.

Many times we are asked about how we can afford to travel for so long and then there’s the predictable wistful response: “I wish I could do what you’re doing.”

That’s when I tell them they can.

I explain in simple terms about investing and how they can create their own pension or annuity or as I like to call it a “personal money machine.” It is right about now when their eyes glaze over like they are speaking with their crazy uncle at a Thanksgiving Dinner.

I bring their attention back by saying they have something that I do not have; time. Usually I get a nod and a blank stare. I go on and ask if they know what “compounding” is. More often than not, they do not have a clue. These are college grads or they are taking a break from school to pursue their traveling bug. But to my surprise they do not understand the concept of compounding, which, in my opinion, is the easiest way to build wealth.

According to Investopedia, the definition of compounding is “the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.


Sweet simplicity.

The earlier you invest, the sooner Findependence

The earlier these “kids” get started investing, the more financially independent and self-sufficient they will be and sooner rather than later. Time is on their side. It takes very little to open an online brokerage account buying shares in VTI, (Vanguard total stock market Index) or SPY (Standard and Poor 500 Index). Fees to purchase shares have never been lower nor has it been more convenient.

From the year I was born, the “average” return for the S&P 500 Index has been 12.41% to the end of 2014. One Dollar invested grew to over $683.00, which is a fantastic return for letting money work for you, the investor. Imagine if I would have had just $1,000 invested the year I was born. It would be worth $683,000.00 today without adding another cent. Amazing! Your mileage may vary and you can check here, but the important thing is for this younger generation to get started now and take advantage of the power of compounding.

We created our own money machine before we retired early in 1991 and we were 38 at the time, older than these young travelers with whom I am speaking. Yet we knew we still had many years for our investments to grow thereby allowing the market work for us while we traveled the globe.

The compounding effect on their early-in-life investments will pay them dividends far into the future and can become their solid foundation for retirement. If there was one thing I could convince them of, it would be to start investing now.

About the Authors

Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance and world travel. With the wealth of information they share on their popular website, they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible.


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