The Magic of Compound Interest
Updated: Jul 22, 2018
Do you want to be a millionaire? Of course you do! And Nathan Lippincott, budgeting expert, is here to tell you how to do it.
“Compound Interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. Compound interest is the most powerful force in the universe.”
– Albert Einstein
Many people ask me when they should begin to do this and the answer is NOW: the sooner, the better. I am going to discuss the “magic” of compound interest and how starting with it early only benefits you in the end.
Who Wants to Be a Millionaire?
I’m going to say something that may shock many of you: anyone on any income can become a millionaire. Compound interest can achieve this, and it is actually rather simple. Let’s look at this scenario: Joe begins his retirement plan at the age of 25. He opens up a retirement account and puts in $3600 per year. He lets it grow this way for 40 years at 8% interest (the s and p on average grows at 10% per year). At 65, when he retires, he will have $1,007,212 in his retirement. $3600 saved per year is not difficult to do.
But the “magic” of compound interest is that you must start sooner rather than later. In this scenario, Joe only invested $144,000 total but earned $863,212 in interest. If he had waited until he was 35 years old to start investing, he would only have had 30 years for his money to grow. At the same interest and investment amounts, he would only have $440,000 in retirement – all because he waited 10 years to begin investing. This is why it is so important to begin investing now.