Compound Interest: 8th Wonder of the World!

There are lots of excuses to justify why one may not have enough money for savings or an investment plan to prepare them for their retirement. I’ve often told myself that I would rather go try out that nice restaurant, or I need to be on a beach somewhere, or I just need another purse. It’s easy to promise yourself you’ll start saving tomorrow, but that tomorrow will end up being next week, or next month, and eventually next year. Unfortunately, not only are you sacrificing your future for immediate satisfaction, you’re also giving up on the magical powers of compound interest. Simply put, it’s the ability to earn interest on your interest. For example, if you put $10,000 into a savings account at 1.5% interest, you will earn $150 at the end of the year. If you leave all that money in the savings account and don’t touch it, at the end of the second year, you will earn $152.25 for doing absolutely nothing. “An extra $2? Whoop dee do!”

Let’s look at this in a different way. You have to choose between the following 2 scenarios:

  1. Starting January 1 until January 31, I will give you $20,000 a day; or
  2. Starting January 1, I will give you a penny. Every day after that, for the rest of January, I will double the previous day’s amount.

Which one would you choose? The $20,000 a day sounds pretty good, hey? That’s $620,000 by the time January 31 rolls around! But if you took that second deal, where the value doubles every day for a month, what would you end up with on January 31? Over $10.7 MILLION dollars!

So the Level 3: Savings Cheat of the Day? Start saving today! Start early in life, preferably in your twenties, but if you’re a bit “more mature” than 20, then today is the next best time to start saving.

How does starting early help you? To help illustrate the magical powers of compounding, the following table is a summary of the annual amount of savings required to be a millionaire when you retire at age 65. The table assumes an annual compounding interest rate of 10%.

Age When You Start Saving

Annual Investment to Retire a Millionaire at Age 65

20

$1,150

Under $100 a month!

25

$1,870

30

$3,040

Around $250 a month!

35

$5,000

40

$8,330

Around $695 a month!

50

$25,300

60

$117,830

Not retiring with a million bucks. 😦

Depending on how old you are, the amount of money required may seem intimidating. Remember, every little bit counts. You have to start somewhere, and gradually increase the savings amount from there.

So what’s the Level 3 Savings Cheat of the Day? Start saving TODAY! Have a good weekend!

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2 Comments (+add yours?)

  1. Trackback: Mutual Fun…ds – Part III « Vix's Money
  2. Trackback: POT: Portfolio Optimized for Taxes « Vix's Money

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