Financial Thought of the Day March 27, 2015: Future Value of a Single Amount—20 Years

The compounding of money is such a powerful thing. Over time it can build up. Three elements go into the compounding of money—Amount, compound rate and time. It can be denoted by the following formula:

Future Value of an amount = (1 +r)^n where

r = rate of return

n = number of periods

With that said:

A single $1,000 amount compounded @ 1% over a period of 20 years which is roughly the equivalent of an online bank account —(1.01)^20 gives you a multiplier of 1.2202 x $1,000 = $1,220.19

A single $1,000 amount compounded @ 10% over a period of 20 years which is the historical return of the stock market as a whole --- (1.10^20) gives you a multiplier of 6.7275 x $1,000 = $6,727.50

A single $1,000 amount compounded @ 22% over a period of 20 years which is Warren Buffett level returns --- (1.22^20) gives you a multiplier of 53.3576 x $1,000  = $53.357.64

In the next post we do 30 years.

Go to stockdissector.com