From Dividend Growth Stocks:
It is the goal of many people to build enough wealth to put their kids through college, payoff their mortgage, be in a position to help their family, and enjoy a financially worry-free retirement. Most people simply don't earn enough to accomplish all these goals without a little help.
If you don't have a generous relative or wealthy parents, you will need to devise a plan to help you reach your goals. Here's how I plan to do it with three very powerful concepts...
The Concept of Compounding
Compound interest is what occurs when interest previously earned is added to the principle and is considered when calculating future interest – i.e. earning interest on interest.
With a constant interest rate your earnings spiral up each and every year when you reinvest the interest. Consider a $100 deposit earning 5%, compounded annually. In the first year you will earn $5, $5.25 in Year 2, $5.51 in Year 3, $5.79 in Year 4, $6.08 in Year 5, and so on.
Once I grasped this concept as a child, it forever changed the way I looked at money. Cash was no longer measured in terms of what it could buy me today, but what is its long-term growth potential.
But there is something even more powerful than compound interest. Unfortunately, something I didn't discover until I was much older...
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More on saving and compounding your money:
Two super simple steps to long-term financial security
The great Richard Russell on how anyone can become rich
Fantastic advice every novice investor should read immediately