The power of compound interest - small savings add up
Even small savings add up
If you don't think it's worth it to try to save a few dollars every week, take a look at how quickly it can add up.
| Amount saved each week |
Total at the end of one month |
Total at the end of one year |
| $5.00 |
$20.00 |
$260.00 |
| $10.00 |
$40.00 |
$480.00 |
| $15.00 |
$60.00 |
$720.00 |
You can do even better. The longer you save money, the more it can grow in value due to compound interest. Compound interest means you earn interest not only on the amount you deposit in a savings account, but also on all the interest you earned previously. (Provided you didn't take out any money, of course!)
Compound interest is one of the most powerful personal finance tools you can put to work for you throughout your life. Want proof? Check out the examples below.
The power of compound interest
What makes compound interest so fantastic? It's the way it grows while it's in your account-and the longer the better. Here are two examples.
Do you think you could earn more in a job that pays $1,000 a day for 35 days or one that pays one penny the first day and then doubles the amount every day for 35 days? Let's look at the numbers.
| |
Amount You'd Have After Day Job Option No. 1 |
Job Option No. 2 |
| 1 |
$1,000 |
$.01 |
| 2 |
$2,000 |
$.02 |
| 5 |
$5,000 |
$.16 |
| 10 |
$10,000 |
$5.10 |
| 15 |
$15,000 |
$163.20 |
| 20 |
$20,000 |
$5,200 |
| 25 |
$25,000 |
$165,750 |
| 30 |
$30,000 |
$5,304,000 (yes, million!) |
| 35 |
$35,000 |
$169,728,000 |
Amazing, isn't it? This example is exaggerated because no one can earn 100% interest on their money (doubling your money every day equals a 100% return rate every day). But the next example illustrates how compounding can make small savers who start young into millionaires by retirement. That includes you!
Another example of the power of compound interest
You can be a millionaire by the time you retire-if you start young. Let's say two 21-year-olds decide to save for retirement. Luis puts $3,000 per year in an IRA and earns 8% compound interest every year. Cheryl waits seven years longer and then begins to invest the same way. At age 65, Luis will be a millionaire-with almost twice as much money as Cheryl-even though he invested only $21,000 more.
| Age |
Luis |
Cheryl |
| 21 |
$3,000 |
$0 |
| 22 |
$6,240 |
0 |
| 23 |
$9,739 |
0 |
| 24 |
$13,518 |
0 |
| 25 |
$17,600 |
0 |
| 26 |
$22,008 |
0 |
| 27 |
$26,768 |
0 |
| 28 |
$31,910 |
$3,000 |
| 29 |
$37,463 |
$6,240 |
| 30 |
$43,460 |
$9,739 |
| 40 |
$137,286 |
$64,486 |
| 50 |
$339,850 |
$182,680 |
| 60 |
$777,170 |
$437,852 |
| 65 |
$1,156,517 |
$657,948 |
Total Invested $132,000
($3,000 a year for 44 years) $111,000
($3,000 a year for 37 years)
Total Earned in Compound Interest $1,027,517
$549,948
That's the magic of compounding and why it pays to get started saving early.