Magic of Compound Interest

For some, retirement is around the corner, for others it can seem a lifetime away. But for everyone, time flies, whether you are having fun or not – you can use that time, and the magic of compound interest, to assure your financial future. No matter how old you are now, this is the time to start saving.

The road to wealth is not necessarily found by working more and earning more, it is about saving what you do earn – if you earn $100 and you spend only $99, then you are always ahead of the game. Compound interest can make that dollar work for you!

With simple interest, interest is only earned on the initial principle, you do not get paid interest on previous interest that you earned; compound interest is much more profitable. With compound interest, interest is received on all funds in your account, including the amount of your initial deposit, plus all earned interest. In this way, your money grows much faster, and really grows over time. This is a particularly effective method of growing your money if done over time. Let’s look at an example:

You graduate college, and Grandma gives you $5,000. You decide to listen to the books you’ve been reading, and invest the money. If you put this money into an IRA, say at an 8% annual return, and never touch the money, by the time you retire at 65, Grandma’s $5,000 will have become $160,000! Sure, it took 45 years, but wow, from $5,000 to $160,000 is a huge climb!

Now, imagine if you flingspot deposited money into such an account. Say, Grandma gave you that $5,000, and you put it in an 8% investment. Then, the next year, you received a bonus at work of $5,000, and added that to the original money. Now, on a roll, you decide to put $5,000 a year into that account. At the end of that 45 years you would have saved nearly two million dollars!!! Yep, $5,000 a year, that’s the equivalent of a decent car payment each month, could make you a millionaire by the time you retire.

It is never too late to start either. Say you are 45, and you plan to work until you are 70. If you take $12,000 out of your savings now, and put it in an IRA, then you add $250 a week to that account, at 8% compounded growth, you could have over a million dollars when you retire!