The Miracle of Compound Interest

For the miracle of compound interest to be effective you have to let time do the work for you. That means that after a few years you can not take the money out and spend it because the longer you are earning interest the more you will make so before getting started you need an Emergency Fund. (That is step 1 in getting rid of Credit Card Debt)

Ok you have the emergency fund now you are going to save $1,000 a year, (What a $1,000 is a lot of money!) Let’s try something smaller like $25 a week we can all manage that.

• One night a week not going out to the nightclubs.
• One night a week not going out to dinner.
• Rent a movie instead of going to the movies.

Well you have got the ideal there are a lot of things you can do to find $25 a week and let compound interest work for you. Oh by the way by saving $25 a week you are now saving $1,300 a year instead of the $1,000 we talked about earlier. It is amazing how the smaller we break something down the easier it is to manage.

Well now where are we going to put our money we know that over the last 50 years stocks have returned 13.6% per year as measured by the S&P 500 Index, but do we want to put all of our eggs in one basket? What other option are there?

• IRA’s
• Roth IRA’s
• 401 K at work
• Certificates of Deposit (CD’s)
• Direct Stock Purchase Plans (DSPP or DSP)

As you can see there are a number of choices that you can make to invest your money in, but for now let’s get back to compound interest.
Table #1 will give you an ideal of the power of compound interest.

As you can see the 18 year old who saves $25 a week and earned 12% interest over the course of 49 years is a millionaire with $3,753,746 at the age of 67. (That sure beats Social Security!) OK so you are not 18 anymore is it to late to start? No, it is never to late to start, you may have to invest more but hopefully you are in a position where you can.

• Mortgage paid off
• Kids grown up
• No credit debt (see our 7 steps)
• Earning more money now

The point is even if you start at 48 and only have 19 years till retirement you will still have more than if you did nothing!
Now even though the S&P 500 has averaged over 13% the last 50 years let’s so you only earn 10% interest on your money refer to table #2.

As you can see again the younger you start the more time your money has to work for you, but even starting at 28 you have over $600,000 to start your golden years. If you only live of the interest at 10% a year that is still $60,000 a year not a bad supplement to your Social Security.

Let me guess you do not like the stock market, because someone you knew followed that hot tip from someone they knew, and got burnt for a large sum of money. That’s OK even safe low risk investments say at 5% would still earn you some cash refer to table #3.

Well we did not reach the millionaires club with this one, but we still built a nice nest egg for the future.

Go ahead and use our Compound Interest Calculator and plan out your future.