Fun In The Snow – Compound Growth Explained

The first signs of winter were overdue this year but once again we’re dealing with the reality of the snowy season. Who can forget that first snowfall and a child’s insatiable urge to build a snowman?

Actually, snow is an amazing substance and children quickly learn that the best snow for making snowmen is the wet sticky type. All children develop a sixth sense when it comes to the fastest way to make their snowman; simply create a snowball and roll it along the wet sticky snow.

For every turn of the snowball, snow is picked up and the ball gets bigger. Since the ball gets bigger, every turn picks up even more snow.

Compound Growth

The growing snowball created by a happy child is a natural example of the magic of compound growth. The snowball grows quickly because the growth is exponential. The bigger the snowball, the more it will grow with each roll.

Now, let’s just say you asked your kids to build another snowman, but this time they could only gather the snow in their hands. I suspect they’d give up in frustration after a short while since it would take a much longer time to build that big snowball.

Although they’re consistently gathering snow using their hands and the snowball is growing in size, the amount of snow gathered is staying the same. The size of the snowball isn’t helping it grow any faster, unlike rolling the snowball was. This type of growth is regular, and it will always be less than exponential growth.

Exponential Growth for You Money

You can achieve exponential growth when you invest your money in shares of a well-diversified exchange traded fund with low fees. These funds commonly make regular monthly payments called dividends. The dividend is based on the amount of shares you own.

You must specify that you want the dividend automatically reinvested into buying more shares of the fund (DRIP). In this way the amount of shares you own increases each month and since the dividend is based on the amount of shares you own the dividend also increases.

Think of the shares you own as your snowball, and each month represents a roll of that snowball collecting more shares through your dividend. The bigger your snowball (the more shares you own), the faster the growth of your snowball (the more shares your dividend buys each month).

Many people are afraid of investing, and rightfully so, but there are exchange traded funds (ETF’s) currently available that create a globally diversified mix of stocks and bonds at record low management fees. Think of them as one stop shopping conveniently bundled into a single investment.

These funds are an excellent example of knowing “just enough” to invest safely and for the long term. You can’t make it any easier than that.

In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.