Compounding

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For the benefit of this exercise we will suppose a regular saving of $5 per week deposited into a bank account and not withdrawn. Try for a "Bonus Savings Account" in which increased interest is paid for any month in which there are no withdrawls from the account.

YEAR ONE

$250.00
We are rounding off the figures so assume some bank charges since we know that there are 52 weeks in a year.

YEAR TWO

$500.00
We now have enough money to open a Cash Management Account at our own bank. If your bank doesn't have a Cash Management Account available then find one which does. Some Banks insist of a minimum deposit of $1,000.00, in which case you will reach this stage in Year Four.

YEAR THREE

$250.00 - in savings account
$500.00 - in cash management account
$ 25.00 - interest on funds in cash management account at 5% (remember that rounding)

$775.00

YEAR FOUR

$250.00 - in savings account
$775.00 - in cash management account
$ 39.75 - interest - say $40.00

$1,065.00

YEAR FIVE

$  250.00 - in savings account
$1,065.00 - in cash managemet account
$   53.00 - interest

$1,368.00

YEAR SIX

Now we have enough money to keep the Cash management account open AND start to invest in stocks and shares. Chose a reputable Equity Trust which pools the money of its investors to buy shares in a wide range of companies. This is a cushion against a poor performance by one or two companies and is a VERY SAFE investment. If you can find one of these equity trusts which has a DIVIDEND RE-INVESTMENT PLAN* then go for it as it is a wonderful way to accumulate capital.

We are going to withdraw $1,000.00 from the Cash Management Fund and and invest it in an equity trust. this leaves:

$368.00 - in the Cash management Account
$250.00 - in the savings account
$ 68.00 - interest

$636.00 and $1,000.00 worth of shares

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If your $5.00 per week had been left in a bank savings account you would now have $1,530.00, give or take a bit for minimal interest and bank charges.

However, if you compound your money you will now have $1,636.00.

And money DOES grow on trees - the more you have the greater the yield.

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*DIVIDEND RE-INVESTMENT PLAN is a great means of increasing your holding of shares in a company. Instead of taking the twice-yearly dividend in cash, the company pays you with more shares in the company, usually at a discounted price and with the certain saving since you pay no brokerage fees.

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