The power of compounding is one of Warren Buffett’s success factors.
Compounding is why you can make a lot of money over time. You MUST understand the power of it, and use it. That’s it.
Compounding is basically reinvesting what you earned into earning more. Why is this so powerful?
Because each time you earn a percentage, that earning is in fact percentage of the initial + a percentage of the previous gains. Then, as you go on, the sum of all the small gains is growing exponentially, making you earn more and more!
Take a look below:
Day 1, I trade $1,000 and earn 2%. This is $20. My total account balance is $1,000 + $20 = $1,020.
Day 2, I trade $1,020 and earn 2%. This is $20.40. My total account balance is $1,020 + $20.40 = $1,040.04.
Day 3 … again, 2%
Day 4, …
Day 30, my account balance is now $1,775.84. I earn 2%. This is $35.52. My final account balance is now $1,811.36.
This is a $811.36 gain over $1,000. Or, it is a 81% gain.