Don’t Forget the Tried-and-True Value of Compounding Interest Carmichael Hill

If you forgot what compounding interest was, let’s get a refresher on it. Compounding interest is the process by which the interest earned on an investment is reinvested, so that the initial investment grows over time. This is a powerful tool that can significantly increase the value of an investment over the long term, making it an important concept to understand when planning for retirement.

The idea is simple – your interest earns interest. For example, you’d have $10,600 at the end of the year if you earned a 6% annual return on a $10,000 investment. If you didn’t spend that $600 earned and continued to let is grow, your $10,600 would be worth $11,236 at the end of year two.

This process of compounding leads to exponential growth over time. Warren Buffett, for example, amassed more than 90% of his wealth after turning 65. Think about that for a moment. The first forty years of his investment career accounts for just 10% of his net worth! This isn’t due to a change in investment style or philosophy. He’s been a staunch value investor for the entirety of his career. Returns merely continued to compound exponentially.

Compounding Interest to Fight Inflation

In addition to increasing the value of an investment, compounding interest can also help to reduce the impact of inflation on your retirement savings. You’ve probably been feeling the effects of inflation on your wallet, but just to be clear, inflation is the general increase in the price of goods and services over time, which means that the purchasing power of your money decreases as inflation increases. By earning compound interest on your investments, you can offset the impact of inflation and help to preserve the purchasing power of your money.

Compounding Interest as an Investment Strategy

Another benefit of compounding interest is that it can help you reach your retirement goals faster. For example, if you have a goal of saving $500,000 for retirement, you may be able to reach this goal faster by earning compound interest on your investments. This is because the more interest you earn, the faster your investment will grow. It pays to reinvest the dividends and interest payments in your accounts!

There are several factors that can affect the amount of compound interest you earn, including the interest rate, the frequency of compounding, and the length of time your investment is held. The higher the interest rate, the faster your investment will grow. Similarly, the more frequently your investment is compounded, the faster it will grow. For example, if your investment is compounded annually, it will grow more slowly than if it is compounded quarterly or monthly. Finally, the longer you hold your investment, the more time it has to grow and compound, which can result in significantly higher account balances over the long term.

Compounding Interest and Your Portfolio

Compounding interest is a powerful tool that can significantly increase the value of your retirement savings over time. It can help your portfolio keep pace with inflation while helping you reach your retirement goals more quickly. Understanding the concept is a critical building block in helping you to plan for retirement and in achieving your financial goals.

Reach out to us today for a complimentary review of your finances if you have questions about compounding interest or how your retirement savings can be put to their optimal and highest use.

REGULATORY DISCLOSURE

Carmichael Hill & Associates, Inc. is a U.S. Securities and Exchange Commission Registered Investment Advisory firm. Registration does not imply that the SEC has endorsed or approved the qualifications of Carmichael Hill or its respective representatives to provide any advisory services. Advisor does not render or offer to render personalized investment advice or financial planning advice through this medium. Advice can only be given after:

  1. Delivery of a disclosure statement by advisor to client.
  2. Execution of our Investment Advisory Agreement between the client and the advisor.
  3. Initial payment of the planning fee or investment advisory fee by the client to the advisor.
  4. Advisor will not solicit or accept business in any state in which she or he is not properly registered or otherwise qualified to conduct business by virtue of a state “de minimis” exemption.
DISCLAIMERS

The information in this web site is based on data gathered from what the Advisor believes are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The identification of specific funds and model portfolios is being made on the assumption that the investor would participate in that investment or portfolio on a long-term basis and only after consulting with their investment advisor to determine their needs and tolerance for risk. With respect to any such identification, there can be no assurance that the fund or model portfolio will in fact perform in the manner suggested.

The results do not represent actual trading due to the timing of the clients’ trades and their trading costs. They may also not reflect the impact that material economic and market factors might have had on the advisor’s decision making if the advisor were managing the clients’ money. Investment and portfolio results may be different than the results the advisor’s discretionary clients achieve due to the timing of trades and the market conditions.

All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.

LINKS DISCLAIMER

At certain places on this Carmichael Hill & Associates, Inc. Internet site, live ‘‘links’ to other Internet addresses can be accessed. Such external Internet addresses contain information created, published, maintained, or otherwise posted by institutions or organizations independent of Carmichael Hill & Associates, Inc. CHA does not certify, endorse or control these external Internet addresses and does not guarantee or assume responsibility for the accuracy completeness, efficacy, timeliness, or correct sequencing of information located at such addresses. Use of any information obtained from such addresses is voluntary.

REGULATORY DISCLOSURE

Carmichael Hill & Associates, Inc. is a U.S. Securities and Exchange Commission Registered Investment Advisory firm. Registration does not imply that the SEC has endorsed or approved the qualifications of Carmichael Hill or its respective representatives to provide any advisory services. Advisor does not render or offer to render personalized investment advice or financial planning advice through this medium. Advice can only be given after:

  1. Delivery of a disclosure statement by advisor to client.
  2. Execution of our Investment Advisory Agreement between the client and the advisor.
  3. Initial payment of the planning fee or investment advisory fee by the client to the advisor.
  4. Advisor will not solicit or accept business in any state in which she or he is not properly registered or otherwise qualified to conduct business by virtue of a state “de minimis” exemption.
DISCLAIMERS

The information in this web site is based on data gathered from what the Advisor believes are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The identification of specific funds and model portfolios is being made on the assumption that the investor would participate in that investment or portfolio on a long-term basis and only after consulting with their investment advisor to determine their needs and tolerance for risk. With respect to any such identification, there can be no assurance that the fund or model portfolio will in fact perform in the manner suggested.

The results do not represent actual trading due to the timing of the clients’ trades and their trading costs. They may also not reflect the impact that material economic and market factors might have had on the advisor’s decision making if the advisor were managing the clients’ money. Investment and portfolio results may be different than the results the advisor’s discretionary clients achieve due to the timing of trades and the market conditions.

All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.

LINKS DISCLAIMER

At certain places on this Carmichael Hill & Associates, Inc. Internet site, live ‘‘links’ to other Internet addresses can be accessed. Such external Internet addresses contain information created, published, maintained, or otherwise posted by institutions or organizations independent of Carmichael Hill & Associates, Inc. CHA does not certify, endorse or control these external Internet addresses and does not guarantee or assume responsibility for the accuracy completeness, efficacy, timeliness, or correct sequencing of information located at such addresses. Use of any information obtained from such addresses is voluntary.