The Magic Of Compound Interest
The magic of COMPOUND INTEREST will literally change your life. I’m not talking about a measly low interest savings account offered by banks and credit unions either!
For the most part, the typical savings account can’t even keep up with inflation and will actually lose money if left there long enough! Although they do serve the purpose for emergency or rainy day funds but even for that I would put it in a Roth IRA. You will get a much better rate of return on your money and you can withdraw emergency funds at any time with absolutely no fees or penalties. With a roth you can withdraw your contributions at ANY TIME but not the earnings it’s made until you’re 59 1/2. I’m not advocating withdrawing from your retirement funds but for an EMERGENCY. I’m just saying if you have thousands of dollars sitting in a low interest savings account, then the roth would actually be a much better choice. Of course if you need your money in a short period of time, then a high interest savings account is okay. So sorry! I got sidetracked lol…..now let’s get back to compound interest.
THE POWER OF COMPOUND INTEREST
The best way to ensure your future financial success is to start saving today, even if all you have seems like a small amount. “The amount of capital you start with is not nearly as important as GETTING STARTED EARLY. “Procrastination is the natural assassin of opportunity. Every year you put off investing makes your ultimate retirement goals more difficult to achieve.” As the chart above clearly shows, why wouldn’t you start TODAY? Now is the time!
The miracle of compound interest is the secret to establishing wealth OVER TIME! Even modest returns can generate real wealth given enough time and dedication … mainly time.
On its surface, compounding is innocuous, even boring. “So what if my money earns less than 1.5% percent in a high-yield savings account?” you may ask. “What does it matter if it averages 8 percent annual growth in an index fund? Why is it important to start investing now?”
In the short-term, it doesn’t make a huge difference — but don’t let that fool you. On the slow, sure path to wealth, we need to keep focused on long-term goals. Short-term results are not as important as what will happen over the course of 20, 30, or even 40 years. (But who in the hell wants to work three or four decades!!??)
GROWTH OF A SINGLE $5,000 CONTRIBUTION
For example, if 20-year-old Jennifer makes a ONE TIME $5,000 contribution to her Roth IRA and earns an average 8 percent annual return, and if she never touches the money, that $5,000 will grow to just under $180,000 by the time she retires at age 65, as you can see from this chart below. And that’s with NEVER contributing to it again! ( And….we haven’t even considered Jennifer’s 401K with her employer match! ) So imagine if she did contribute to it yearly and maxed it out! You’re allowed to contribute $5500 a year to your roth IRA. $6500 a year for 50 years old and up.
You can see how the money earned thumps the initial investment more and more as time goes by.
So….if she waits until she is 40 to make her single investment, that $5,000 would only grow to less than $40,000. (On the chart, the red dotted line shows you the total value after 25 years is still less than $40,000.) Waiting 20 years will cost her more than $130,000 in “free” money. TIME is what makes the magic that is COMPOUNDING.
That’s a HUGE DIFFERENCE for her retirement! So you can easily see how EARLY RETIREMENT is extremely possible and highly achievable, especially if you start EARLY. So why wait? Do you really want to WORK for 45-55 years??? Let that sink in.
GROWTH OF ANNUAL $5,000 CONTRIBUTIONS WITH COMPOUND INTEREST
Compounding can be made even more powerful through regular investments. It is great that a single $5,000 IRA contribution can grow to more than $170,000 in 45 years, but it is even more exciting to see what can happen when Jennifer makes saving a habit. If she were to contribute $5,000 annually to her Roth IRA for 45 years, and if she left the money to earn an average 8 percent return, her retirement savings would grow to more than $2 million, as you can see from this chart:
A pot full of cash indeed! She will have more than eight times the amount she contributed. Again, the dark green portion of the chart thumps the light green, which is the money she put in.
This is the extraordinary power of compound interest!
Why not let it work it’s magic for YOU? The rat race and everyday grind would be reduced by DECADES!
HOW TO ACQUIRE GREAT WEALTH OVER TIME WITH SELF DISCIPLINE AND PERSEVERANCE
You can make compounding work for you by doing a few simple things:
1. START EARLY. The younger you start, the more time compounding has to work in your favor and the wealthier you can become. The next best thing to starting early is starting now.
2. Make regular investments. Don’t be stingy. Remain disciplined, and make saving for retirement a PRIORITY. Do whatever it takes to maximize your contributions.
3. Be patient. Do not touch the money. Compounding only works if you allow your investment to grow. The results will seem slow at first, but continue on. Persevere! Most of the magic of compounding returns comes at the very end. Compounding creates a snowball of money. At first, your returns seem small; but if you are patient, they will become enormous! A special thanks to Get Rich Slowly for the charts and stats!
Folks the time is NOW. PLEASE START SAVING FOR YOUR RETIREMENT!
Thanks for reading,
$aving George Makes Benjamin’s
Note: This article was originally published at $aving George.
Category: Personal Finance
