Start Saving NOW!!!

So how exactly can the average Joe become a millionaire. One way could be by winning the lottery. Another way can be by inheriting it. Now how about doing it yourself. You may not have a million dollar idea, or the athleticism to become a pro athlete, but you do have something on your side. That is, compound interest.

Compound interest is the adding of accumulated interest back to the principal, so that interest is earned on interest. Compound interest is found everywhere specially in loans. More importantly it is found in your retirement savings account. It won’t make you rich overnight. Compound interest works in a slow but steady pace. As interest compounds, month after month, or year after year, the pace picks up and that is when you can earn some serious cash.

Take a look at this example from mindyourfinances. If the link doesn’t work here it is as well: Two different individuals–Darryl and Cheryl, each 22 years old–have an extra $2,000 a year to invest or spend as they choose. Darryl opens an Individual Retirement Account (IRA) to start saving. Cheryl chooses to spend her $2,000.

In this example, Darryl’s IRA earns 12% per year. Darryl saves $2,000 per year for six years, then never puts another cent into his IRA.

Cheryl spends her $2,000 per year for six years. After that time, she invests $2,000 per year until she is 65 years old. Cheryl earns the same 12% interest per year that Darryl does.

The chart below shows the value of Darryl’s and Cheryl’s respective IRAs, from the time they are 22 years old all the way to 65. Keep in mind, Darryl’s total investment is $12,000 ($2,000 per year for the first six years), while Cheryl’s is $74,000 ($2,000 per year for the last 37 years).

Age Darryl Cheryl
22 $2,240 $0
23 4,509 0
24 7,050 0
25 9,896 0
26 13,083 0
27 16,653 0
28 18,652 2,240
29 20,890 4,509
30 23,397 7,050
35 41,233 25,130
40 72,667 56,993
45 128,064 113,147
50 225,692 212,598
55 397,746 386,516
60 700,965 693,879
65 1,235,339 1,235,557

The earlier one starts saving the better. It is never too late too start investing. Whatever it takes put money away NOW!!! No matter how small the amount is, every little bit counts. In this particular example it took Cheryl almost a whole working life time to catch up to the 6 years of investment done by Daryl when he was 23. All done by the power of compound interest.

If you want to see what compound interest would do for you, use this calculator I found in Moneychimp just plug in and it will give you the future value of your investment. Bare in mind that this is a very simple calculator that doesn’t take things such as risk into account.


1 comment so far

  1. […] and to the point answers on personal finance.  In previous posts, I have covered things such as compound interest, high yield savings account, 401k’s, and more.  The next topic I would like to talk about […]

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