{"id":54416,"date":"2021-11-03T13:34:00","date_gmt":"2021-11-03T17:34:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=54416"},"modified":"2021-11-17T10:37:56","modified_gmt":"2021-11-17T14:37:56","slug":"the-power-of-compounding","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/","title":{"rendered":"Wealth Building and the Power of Compounding"},"content":{"rendered":"\n<p>How do you use <a href=\"https:\/\/www.shortform.com\/blog\/the-power-of-compound-interest\/\">the power of compounding<\/a> to <a href=\"https:\/\/www.shortform.com\/blog\/building-wealth\/\">build wealth<\/a>? Can a compounding investment strategy help with taxes?<\/p>\n\n\n\n<p>A passive investment approach utilizes the power of compounding to build wealth. You will earn interest on the money you originally invested plus on the interest you have accumulated. As the pool of money grows, your rate of returns will also grow exponentially. This strategy will also help with taxes because you only have to pay taxes once on the accumulated pool of money as opposed to paying each year and diluting the impact of your capital gains.<\/p>\n\n\n\n<p>Read on to understand more about the power of compounding.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The Power of Compounding<\/strong><\/h2>\n\n\n\n<p>Compounding growth is a formidable force. Growing consistently at a steady-but-not-impressive rate, like 15%, can yield big results over time\u2014such an investment will double every 5 years, and thus grow by 16 times over 20 years.<\/p>\n\n\n\n<p>Taxes make a big difference in compounding growth as well. Compare a passive and active investment approach with the same annual rates of return.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>In the passive approach, you earn 15% per year for 30 years, then liquidate at the end of the period, paying a one-time 35% tax. You\u2019ll have 43x your initial investment at the end.<\/li><li>In the active approach, you earn 15% per year, but need to pay 35% tax each year due to <a href=\"https:\/\/www.shortform.com\/blog\/active-trading\/\">active trading<\/a> and creation of capital gains. Here you earn only 9.75% per year; at the end of 30 years, you\u2019d earn only 16.3x your initial investment.&nbsp;<\/li><\/ul>\n\n\n\n<p>With growth that\u2019s not taxed, you have a difference of 2.6x in the same investment period, despite having the same nominal pre-tax growth per year.<\/p>\n\n\n\n<p>However, there are natural limits to the power of compounding. Because of finite resources, a company or investment cannot grow at the same compounded rate indefinitely (if it did, it would eventually consume all the money and resources in the universe).<\/p>\n\n\n\n<p>The idea of compounding applies to general life as well. Say Munger: \u201cYou don\u2019t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"<p>How do you use the power of compounding to build wealth? Can a compounding investment strategy help with taxes? A passive investment approach utilizes the power of compounding to build wealth. You will earn interest on the money you originally invested plus on the interest you have accumulated. As the pool of money grows, your rate of returns will also grow exponentially. This strategy will also help with taxes because you only have to pay taxes once on the accumulated pool of money as opposed to paying each year and diluting the impact of your capital gains. Read on to<\/p>\n","protected":false},"author":10,"featured_media":8658,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[79,31],"tags":[533],"class_list":["post-54416","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-entrepreneurship","category-money","tag-poor-charlies-almanack","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Wealth Building and the Power of Compounding - Shortform Books<\/title>\n<meta name=\"description\" content=\"How does the power of compounding help you build wealth? Here is how passive investing coupled with compounded growth leads to riches.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Wealth Building and the Power of Compounding\" \/>\n<meta property=\"og:description\" content=\"How does the power of compounding help you build wealth? Here is how passive investing coupled with compounded growth leads to riches.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/\" \/>\n<meta property=\"og:site_name\" content=\"Shortform Books\" \/>\n<meta property=\"article:published_time\" content=\"2021-11-03T17:34:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-11-17T14:37:56+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/s3.amazonaws.com\/wordpress.shortform.com\/blog\/wp-content\/uploads\/2020\/05\/money-growing-outsiders.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1920\" \/>\n\t<meta property=\"og:image:height\" content=\"1297\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Joseph Adebisi\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Joseph Adebisi\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/\"},\"author\":{\"name\":\"Joseph Adebisi\",\"@id\":\"https:\/\/www.shortform.com\/blog\/#\/schema\/person\/d8daf45671a09e8745a7a9f50a03b2a0\"},\"headline\":\"Wealth Building and the Power of Compounding\",\"datePublished\":\"2021-11-03T17:34:00+00:00\",\"dateModified\":\"2021-11-17T14:37:56+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/\"},\"wordCount\":354,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#organization\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2020\/05\/money-growing-outsiders.jpg\",\"keywords\":[\"Poor Charlie&#039;s Almanack\"],\"articleSection\":[\"Entrepreneurship\",\"Money\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/\",\"url\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/\",\"name\":\"Wealth Building and the Power of Compounding - Shortform Books\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/the-power-of-compounding\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2020\/05\/money-growing-outsiders.jpg\",\"datePublished\":\"2021-11-03T17:34:00+00:00\",\"dateModified\":\"2021-11-17T14:37:56+00:00\",\"description\":\"How does the power of compounding help you build wealth? 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