Compound Interest and the Power of Starting Early for Retirement

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Compound interest is an insanely powerful force, and the explanation behind why you need to start saving and investing as soon as possible — even if you feel like you don’t have enough money to make a difference.infographics_compundInterest_870

The math works in your favor as long as you provide your money what it really needs to grow: time. Compound interest works on an exponential curve, and it allows your wealth to grow exponentially as well.

You don’t necessarily need a high level of income to become wealthy and to reach your retirement and financial goals. You only need a willingness to start saving right now, even if it’s just $10, $50, or $100 per month. What you save and invest today is going to be far more important than the number on your paycheck that you earn ten or twenty years from now. Our infographic clearly illustrates this.

Want a more detailed example? Say you had $1,000 that you could open a Roth IRA with today. After you open your account, you contribute $100 to it every single month for 30 years. Assuming an 8% return, your initial investment and regular contributions would grow to $146,002.51.

Now let’s say you decided you were too young to worry about retirement right now. After all, it’s something that is decades in the future and you don’t even know what you want your retirement to look like at this point. You’re young; you have other things to worry about.

This is a financially dangerous line of thinking. Consider this: say you finally decided it was time to think about retirement when you hit 40. You do the same thing that your younger self did in the other example: you opened a Roth IRA with $1,000. But you’re older, and now you have the means to contribute more — so you contribute $300 per month.

However, this time around you only have 15 years to let your money compound before you want to retire. In this example, your account would only be worth $100,919.78, even if we assume the same 8% return and even though you contributed three times as much per month.

All the extra money you can throw at investments later doesn’t matter, because you’ve lost the most important factor in investing. Nope, that factor is not “having more money later.” You have all you need already, because that important factor is time.

It’s crucial that you just start. Time, thanks to compound interest, is a far more powerful factor than anything else in determining how wealthy you will be.

But don’t take our word for it. Crunch your own numbers and see how the math can work out for you and your money, too. Use a compound interest calculator to see how your wealth could grow exponentially over time if you diligently start saving now instead of throwing cash at your retirement funds later.

By Kali Hawlk, Staff Writer

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