What is COMPOUNDING INTEREST and How It Can Benefit YOU!

Posted on July 10, 2008. Filed under: -- Building Wealth, -- For The Investor In YOU, -- Investing, -- Money Help (in simple terms), -- YOUR Retirement | Tags: , , , , |


 

By Molly Greaves

If read my posts regularly, you’ve probably noticed that I always say ” if time is on your side.” That’s because when you’re so lucky and don’t even realize the opportunities you have to create a large abundance of wealth. That’s because the sooner you start saving, the more time your money has to compound.

Compounding occurs when the money you invest earns money–such as interest in a savings account or returns on your 401(k) investments– and those earnings in turn earn money. In other words, the more you save now, the more compounding can increase your savings. 

Let’s apply it to real-life.

Start at 20, and set aside 15% of everything you earn (including gifts and such) and you will be in good shape at retirement. Wait until you’re 40, and it will be 25% or more of every dollar earned. Wait until 50, and it will be 45% of every dollar earned.

You can look at it this way too. If you invest $1,000 per year in a tax-deferred account that earns 7% a year beginning at age 25, you will end up with $199,635. If you invest the same amount, starting at age 40, and you’ll end up with only $63,249.

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