Compound Interest – A Millionaire’s Best Friend

compound returnsWe have all been told that the sooner you start saving for your retirement, the better. Have you ever taken a look at how drastic of an impact that advice can really have?

Let’s walk through an example.

Two teenage friends, Stanley and Bill have the opportunity to put money away in an investment account that has an average annual rate of return of 12%. Stanley decides to start putting $2,000 into this fund every year for eight years starting at age 19. After eight years, he stopped adding to the account.

Bill, on the other hand, waited until age 27, thinking he was in better shape financially, and put $2,000 a year into his investment fund. He continued to do so every year until he turned 65. He had the same 12% annual return as Stanley, but he invested for 23 more years than Stanly did. Bill put in $78,000 over 39 years. Whereas, Stanley had invested only $16,000 initially, but started eight years sooner.

Guess what happened.

Just putting away $2,000 a year during his working years, Bill found himself in pretty good shape upon reaching retirement age. He had accumulated $1,532,166. Not too bad.

His friend Stanley, on the other hand, at age 65, without investing another cent after his first eight years, had amassed $2,288,966. He came out with over $750,000 more because of starting sooner. Bill could never catch up.

That is the power of compounding returns. Knowing that you could have that much more money in 40 years, by putting away a little bit today, could you find a way to save $2,000 each year? Maybe even just $1,000? Waiting means only one thing. You will have less money in the end. That is why it is so important to start saving now.

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