Can I really make over $1,000,000.00 putting away only $160 a month? Yes. See our short course on compound interest, the Eighth Wonder of the World.
Welcome to Learn Investing. This Virtual Class
will teach you about what I call the Eighth Wonder of the World: Compound
Few people truly recognize the power of compound interest and even fewer take advantage of it. In this virtual course we will show you just how wonderful compound interest can be for you, and how it really can hurt you if you let your interest accruing debt get out of hand.
First, I will start off with a very basic question for you. Imagine that you were just starting off working. You are age 18 (again) and you decided to save $2000 per year (that is about $40 per week). You decide to save the $2000 per year for 15 years and then you decide to stop adding money. You then leave the amount you have to accumulate interest until you are ready to retire at age 65. Your annual interest rate is 10% (which is approximately what you could earn if you left your money in the stock market for many years). How much would you have when you decided to retire?
Well the answer may shock you. If you started saving when you were 18 and you put away $2000 a year for 15 years. That is, you save from age 18 through age 32 and then you stop saving. If you retired at age 65 and just let your money work for you, then you would have saved over one million six hundred thousand dollars! Let us examine how this is possible.
On the first page is a chart of interest and compounding. "What is compounding?" you may ask. Well, compounding is when you put money away and that money earns interest on it. Letls say that it takes a year for your money to earn 10% interest. Then after a year you have all the money you put into savings plus 10%. So if you started with 100 dollars and earned 10% then after a year you would have $110. Now here is where compounding comes in. That $110 that you now have in the bank is going to earn you interest. You are earning interest on the $100 you placed in your account plus you are earning 10% on the $10 that you earned from last year. So instead of earning $10 in interest on the second year you actually earn $11. This $11 is added to your account bringing the total in your account up to $121. Now here is where it really starts to get good: you continue to earn interest on your both your initial amount and also on all the interest you have already earned. It does not take long before your interest in your account is more than the initial amount you put in to start.