The Power of Compound Interest
- Would you rather have a million dollars now or take a “brand new” shiny penny now and double the amount for 30 days?
- By taking a penny now, in 30 days you would have accumulated over $5,368,000. That is more than $4 million dollars than if you’ve taken the $1 million at month-end.
- This is called compound interest. It is commonly known as the 8th wonder of the world.
- It magically turns a little bit of money, invested wisely, into a whole lot of cash.
- When you save and invest; your money earns interest, or appreciates. The next year, you earn interest on your original money and the interest from the first two years.
- It’s like a snowball – roll it down a snowy hill and it’ll build on itself to get bigger and bigger. Check this out:
Doubling a Penny Everyday for 30 Days
Day 1 = $0.01
Day 5 = $0.16
Day 10 = $5.12
Day 15 = $163.84
Day 20 = $5242.88
Day 25 = $167,772.16
Day 30 = $5,368,709.12
To make compounding work for you, follow these three basic principles:
- The sooner you start the better. For example, a 25 yr old needs to invest only $175 per month (10% return) will become a millionaire when they retire at age 65. Now, a 40 yr old would need to contribute $850 (10% return) per month to attain millionaire status at age 65.
- Make regular investments. Take advantage of your 401(k) and 403(b) at work and IRA accounts as well. These are tax-advantage investments in which no taxes are deducted while they are growing. The more you save, the more you let compounding work its magic. Even a little bit goes a long way.
- Be patient! Compounding works only if you allow your investment (capital) to grow. It takes time to see the wonders of compounding returns. Invest wisely and leave your money alone over the long tern.
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