Making your money grow by investing and reinvesting

This post uses hypothetical person who manages to save 20% of his salary every month.

It assumes that he invests in a conservative investment that pays just 4% dividend every year, and he reinvests all his money.

It also assumes that there is no inflation because the addition of inflation rate will make calculation very complicated. 

It also assumes that he does not get any bonus or salary increment year after year.  That will definitely complicate the calculation.

I also take the liberty of assuming that he does not have a year of unemployment or a period of extremely high financial expenses that require him to liquidate his investments.

Let us see how his money grows if his salary is $1000 a month, and he saves $200 a month.  To keep things simple, the calculation is based on yearly basis.

In the first year, he saves $2,400, and earns $96 based on 4% dividend gain.

In the second year, he saves another $2,400, and with his $2,496 from the first year, he will make $195.84 in dividend. 

20 years later, he will have a total of $74,326 in investment holding.  That is good money since we assume that he makes just $1000 a month for 20 years.

The table below shows the calculation:

After 20 years, with his capital of $48,000, he has a total saving of $74,326.

While this does not sound like a lot money, bear in mind that the habit of saving, investing and re-investing is a lifelong habit.

Most people do not just save $200 a month for 20 years if they have yearly increment, and they have bonus.  They will save more, and their money will grow faster.