Question

Which advice best relates to the power of compounding?

A. It's never too late to start investing, as compounding doesn't make a significant difference.
B. Compounding only works with short-term investments, so focus on those.
C. Start investing as early as possible.
D. Invest only a large sum of money at once to maximize compounding.

Answer 1

The best advice related to the power of compounding is to C. start investing as early as possible to allow your money more time to grow exponentially due to compound interest.

Step-by-step explanation:

The advice that best relates to the power of compounding is C. Start investing as early as possible.

The concept of compound interest allows your investments to grow exponentially over time because you earn interest not just on your initial principal but also on the accumulated interest from previous periods.

For instance, if you start at age 25 with a $3,000 investment at a 7% real annual rate of return, after 40 years, you would have $44,923.

This result is achieved through the formula for compound interest:

Future Value = Present Value (1 + interest rate)^number of periods

Therefore, in this example:

$44,923 = $3,000(1 + 0.07)^40

This illustration demonstrates why it's crucial to begin saving and investing early.

With more time, your money has a greater opportunity to benefit from the power of compounding, potentially leading to a substantial accumulation of wealth.