OK. Let's define what compounding is. You heard this work before. Almost on every early retirement or financial independence website or blog. You think you know what is it. And probably you are right. So, what is this mysterious compounding?
If you want a fancy definition then i will tell you. Compounding is defined by a nonlinear growth in dividend income. Too much even for me. Just in case, i will have an example here. Not necessarily for you, but you can see it too.
Today i become an uncle. I just got a one day old nephew. I have no merit with this, it's all my brother's work. By the way, welcome to the family Gabriel! The accountant in me took the reins and instantly did a plan for his financial independence. I will presume that my brother, in his infinite wisdom, will take care of his baby until the age of 20.
My expenses at the moment are 715. I will go for something like this. Maybe a bit more as a 20 years old will what to relax a bit more. Let's say 10K per year. Seems good enough. It is something like 833 per month. Enough to cover your house expenses, transport and food, but not enough to live without work. At least you can choose a work not thinking about how much they pay, but how much you like it.
My initial plan was to start with 8750 (offering an amount of 350 as dividends in the first year). Will reach 1000 as dividends in 11 years, 2000 after another 5 years and another 1000 will be added every 2 years. 11+5+2+2=20 years. Sadly that is only 4K per years. Not enough. I did another simulation and i found that if i invest 17500 for dividend growth income, and reinvest everything for the next 20 years (yes, the miracle of compounding), i will reach my goal of 10K payed in dividends per year.
Is too easy, but really! You can give you child the most important gift ever. To start in life being financially independent. Of course, now i am thinking at some side projects. Imagine that, to offer this to an 20 years old. What can happen? So i decided that some financial education is a must, as it is reaching some numbers in savings and failing at least 5 times in different business projects. What if you don't fail, you will say. Than is even better, that mean that you are ready to be free.
I will definitely do this for my children too.
What do you think?
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