"Rolling Snowball"

Remember the snowball rolling downhill in the comic that you enjoy reading while you were young? And it just gets bigger and bigger?

(Image source: Web)

We are all familiar with that, eh?

Now, how about the term "snowball effect" or "compounding effect"?

What is the Compounding Effect?

No, it is not something that brings harm to you or any insects on the Earth.

The “compounding effect” has been bouncing off your eardrums whenever you talk about savings and investments with anybody.

At the end our previous article, we imagined the compounding effect on the money we could have saved on coffee..

We all know that putting money into a bank savings account earns us an interest every year, and this gives us the incentive to keep putting money into the bank account.

Simply put, we get paid for keeping our money in an interest earning facility!

Human beings love to see things (numbers, in this case) grow and we derive that sense of triumph when growth happens. Each time we look at our bank balance, how many are actually aware that your money is actually growing at a compounding rate?

“Compounding is the process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes. This exponential growth occurs because the total growth of an investment along with its principal earn money in the next period.” - Investopedia

(Note: Although the definition above only mentioned investments, the compounding effect works the same for both savings and investments.)

We look at the following on how the compounding effect impacts our savings:

Say you save $2 every day and we assume that your piggy bank pays you 1% interest per day!

Day 1: You started with zero balance and so you put $2 into your piggy bank. At the end of the day, your piggy bank will pay you the interest of $0.02 for you to begin Day 2!

Day 2: The day started with $2.02 in your piggy bank and you continue to put another $2 into your piggy bank. At the end of the day, your piggy bank pays you 1% of $4.02 as interest! That brings your balance up by $0.04!

Are you beginning to see something here now?

The interest money that you earn is getting higher and higher as time goes!

So you continued putting in $2 every single day for a month in a disciplined manner and at the end of the 30th day, your piggy bank will have $70.27!!!

Do you know what that meant?

You have put in only $60 and harvested $10.27 as interest earnings!

Isn’t that amazing!?

Let time be your friend!!!

There are people who leaps into action immediately, and there are also people who procrastinates.

“Well, it will be the same if I do it later.”

Let’s see if we waited to start only halfway through the month:

Putting in the same $2 everyday, we could have only achieved $30 and an interest payment of only $2.52! The difference between the total amount stands at $37.75!

Stark contrast, isn’t it?!

So how can we catch up with the plan?

One will have to save $4.35/day for that 15 days in order to catch up.

This actually means that you will have to put in 217.5% effort in order to match up!!!

Will this at be sustainable for you?

Will it be better if you start now?

Take action now, to avoid playing catch-up.

(Advise: always have at least 6-8 months of savings before you start to consider lump-sum investments.)

Remember our $5-rule? Put the numerous $5-notes that you have collected into your bank savings account at the end of every month, and watch it grow in a snowball effect!

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