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The Power of Compounding
An Investment Spin on “The Tortoise and The Hare”
What is compounding?
The process of reinvesting earnings (i.e., interest, dividends and capital gains) back into your investment, so that over time the increasing value of your total investment can help your assets grow more quickly.
Simplified even further, compounding equals “earnings on earnings.”
To illustrate this point, let’s take a look at a hypothetical example using two investors as they race to retirement.
We’ll call them Tortoise and Hare. And to keep it simple, let’s just assume everyone is earning an eight percent hypothetical return of on their investments.
Hare is first out of the gate, beginning to invest at age twenty-five. Hare invests a thousand dollars every year for forty years.
Tortoise, however, is a little slower out of the gate. At age thirty-five, Tortoise starts to invest, too. Tortoise invests a thousand dollars every year for thirty years.
As they approach the finish line and each turn age 65, Tortoise feels good about making up for lost time. In fact, Tortoise’s original thirty-thousand dollar investment has grown to a total account value of $122,346.
But when they compare their retirement balances, Hare’s original forty-thousand dollar investment has nearly doubled Tortoise’s for a total account value of $279,781 - meaning Hare has accumulated $157,435 more than Tortoise.
Unlike the fable, this time, first out of the gate wins. The lesson? Start early and invest regularly. With the power of compounding you can grow even a small investment into a much larger one over time.
Invest in your future today. Contact PNC Investments at 855-PNC-INVEST or stop by a local branch.
Note: The hypothetical example used is for illustrative purposes only and does not reflect an actual investment. It does not take into account any investment fees, charges, or taxes. This example assumes a hypothetical 8% average annual return and an annual investment of $1,000 at the beginning of the year with the total account value representing the total account value at the end of the investing period. Actual investment results will differ from this illustration.