Earning compound interest can make you money. Potentially it can make you a lot of money. Today we’ll show you two examples of how you can benefit from compounded returns.
This is part 2 of our Compound Interest Series. Part 1: Paying Compound Interest, can be found here.
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Listen Now: Earning Compound Interest
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Earning Compound Interest: The Basics
There are two key components. First is the return you earn. When we are saving and investing, we have many choices. Some investments have greater earning potential than others.
The second key component is time. The longer you can let your money compound the better.
Here is our first example. This is something as a financial planner you learn on day one.
You contribute $2,000 per year at the beginning of every year, and you do this for 40 years—$80,000 total. And you earn the long-term average return of the stock market, which is 10%. It grows to nearly a million dollars.
This was the “pitch” you learned to convince someone to make an IRA contribution. But let’s take a look at how the returns you earn impact the totals.
The Impact of Time and The Cost of Waiting
We said earlier, time matters. In fact, time might be your biggest asset as a saver. Here is another example from day one of financial planner school. And it illustrates the cost of waiting to start saving.
Waiting to start saving means you have to save more to achieve the same result. In this example, Investor A saved $40,000 total and reached $850,000. Investor B had to save $13,500 per year, or $270,000 total, to accumulate $850,000 at the same time.
The impact of compound interest isn’t linear. It’s exponential. And when you understand how it works, you can alter your future for the better. Teaching younger people to save early in life is critical.
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About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors He typically works with people who are planning for retirement. Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio. Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.