Bridging The Gaap

Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

 

Time and compounding: Start Early, Save Big!

Let’s take a look at an investor who wants to start their money growing using the power of compound interest. I recently discovered a fun calculator on the ING website (no, I don’t profit from directing you there, I just thought it was a great calculator), so I’ll be using that for the following examples. You can find it and follow along HERE.
Let’s assume the following for our young investor:
• She invests and initial amount of $1000 on her 20th birthday.
• She will be able to invest $2100 a year (in payments of 175$ a month) from now until she’s retired.
• She plans to retire in 40 years, at age 60.
• She also will earn an average yearly rate of return from her investments (another way of saying interest rate) of 10%.
You can see where I’ve inputted these numbers in the calculator below.

Press calculate to see the result!

At age 60 our investor will have $1,160,239.59!
Of that, $1,075,414.59 is pure interest.
92.68% of her money is pure interest.
The total investment form her pocket is a mere $85,000.

You can click on “show table” on the bottom to see exactly how much she will have every year from the time she is 20 to the time she is 60. Here’s an example of what she’ll have accumulated in savings and how much of that is interest from years 6 to 15 (if you’re following along you can scroll down to see more).

Nice isn’t it?

But wait, there’s more! Remember how I said time was important when it comes to compounding? What if our same investor did the same exact same thing, but waited until she was 30 to start investing her $1000 plus her 175$ every month?

With 30 (instead of 40) years until retirement, her nest egg will look very, very different…

Oh SNAP! By delaying her investing by ten years, she end up with less than HALF of the end amount she would have earned if she’d started 10 years earlier!

This is one of the great lessons of compound interest: time matters. The sooner you start, the longer you money ahs to compound upon itself. This is why it’s so important to START AS SOON AS POSSIBLE!

So if you’re young, you have all the more reason to start investing: it’s not something just for rich old farts any more!

A Word Of Caution:

Always do your research before you invest anything anywhere. BTG has reviewed some great books to help you get started towards financial literacy, and remember: you can always hire a fee only financial planner to help you figure out what kinds of investments are right for YOU. Index investing may not be for everybody (though you should definitely consider the possibility!). You can search for a fee only financial planner in your area by heading over to one of these links:

Canada:
http://www.canadianbusiness.com/my_money/planning/article.jsp?content=20061024_095045_5484
http://www.cfp-ca.org/public/public_findaplanner.asp I am a student associate of this organization

United States

http://www.cfp.net/search/

Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

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