Compounding: Working for You, or Against You?

I wrote “One Simple Rule for Building Wealth”, about using the “Rule of 72” as an estimation to calculate doubling periods for our money based upon a hypothetical rate of return and time frame. I encourage you to teach those you love about money and how the Rule of 72 can motivate us to build wealth over the long-term. The key component is compounding:  putting money to work so that our original contribution earns a rate of return, increasing in size, essentially continuing growth on the growth. 

Did you ever stop to think about that concept in reverse? Spending money you don’t have, charging your purchases to credit cards and not paying off the full balance immediately the next month can be an example compounding in reverse, and you’re now dealing with the debt devil.  Your reverse “contribution” is the charge onto the credit card.  If you are charged interest on your balance and you do not pay off the full amount, the interest may accrue adding onto the debt you owe.  If you are again charged interest on the new balance, which includes your original purchase plus interest on interest, you are compounding your debt. Even worse are examples of when this debt was used for purchases that do not appreciate in value, which is the vast majority of credit card spending.

Simple good decisions can compound. Simple bad habits can also compound. Which do you choose?  Compounding to work for you, or against you?

LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com TheWealthInformationLady.com  SchulferAndAssociates.com 

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.

The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform.  It is an approximation of the impact of a targeted rate of return.  Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.