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Albert Einstein called it the “Eighth Wonder of the World.” Compound interest can seem miraculous when you see how it can make your money grow. Compound interest may sound technical, but it really just is earning money on your money.
Here are a few examples of how compounding can make your money grow:
Initial Amount Saved |
Value After 10 Years |
Value After 20 Years |
Value After 30 Years |
$1,000 |
$1,647 |
$2,713 |
$4,468 |
$2,500 |
$4,118 |
$6,782 |
$11,169 |
$5,000 |
$8,235 |
$13,563 |
$22,339 |
Note: To simplify, a 5% rate of return is used with no taxes.
If compound interest is about making your money grow, then here are a few tips that will make it grow faster:
Start early. You probably have heard this before, but it is true. The sooner you start, the less you need to save to achieve the same results.
Want to be a millionaire? If you want to accumulate $1 million by age 65 and you start at age 40, you will have to set aside just over $1,000 per month. (To keep it simple, we assume you will earn 8% a year and do not include taxes or inflation.) But start at age 20, and you only have to save $190 each month.
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Keep at it. If you do not have a lot of money to start, don’t despair. Even a small amount every month can add up and give you the motivation to add more. The earlier you start, the better!
Monthly Amount Saved |
10 Years |
20 Years |
30 Years |
$10 |
$1,569 |
$4,137 |
$8,367 |
$25 |
$3,923 |
$10,343 |
$20,918 |
$50 |
$7,846 |
$20,687 |
$41,836 |
Note: To simplify, a 5% rate of return is used with no taxes.
Make it automatic. If your employer allows automatic deduction from your paycheck to a savings or retirement account, take advantage of it. Out of sight means out of mind! If not, many investment companies and financial institutions will be happy to help you set up automatic transfers from your checking account to a savings or investment account.
Save and invest wisely. Do not let your money sit for too long in an account earning little or no interest. As your balance grows, look at opportunities to increase the rate of return you are earning. We will talk about where to stash your cash in the next section.
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