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March Sadness - People don't realize they NEED compounding

It is exciting to think of money working for you, compounding and growing! Perhaps this excitement offsets some of the dread you experience when you have to list all of your future financial needs and set savings goals. But you must understand a critical point, you actually NEED the compounding. Compounding is not a luxury or 'bonus'. Unless you have unique earning power (or win the lottery), your future financial needs will exceed what you can save and set aside. So again, you need your money to grow, and the earlier you start saving and compounding, the more it can grow.

Saving early in life is also good because growth is rarely in a straight line. There will be periodic losses. The earlier you start means more time to ride out and recover from fluctuations in returns. If you start too late you may find yourself in retirement with a nest egg too small to both support withdrawals and recover from market declines.

You also need compounding growth due to inflation. The term inflation refers to a general rise in prices of a broad basket of goods. In the US, we generally don’t see inflation extremes other countries experience. On average, our prices tend to increase about 1-3% a year (...please don't get my cynical side worked up since I don't believe the government's calculation reflects the reality of food, healthcare, and education price inflation or how low income households benefit less from product substitution or technology improvements). Thus, since the purchasing power of a dollar today is diminishing over time, we need some growth simply to maintain the same purchasing power going forward.

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