Friday Financial Tidbit-The Power of Compound Interest

If you have read or been taught anything about investing you know that they always say to invest now instead of later.  Why is that?  Simply put, it is the principle of compound interest which is your interest earning interest, compounded over time.  It is a powerful financial principle but how powerful?

In our example we have Jack and Jill.  Jack puts $2,000 a year in a ROTH IRA as soon as he can.  Meanwhile, Jill spends $2,000 a year instead of investing it.  After six years, Jack does not put another dime into his IRS while Jill then contributes $2,000 a year for the next 29 years.  Their average return is 12% a year.  Look how much each has after 35 years.

Year Jack Jill
1 $ 2,240.00
2 $ 4,748.80
3 $ 7,558.66
4 $ 10,705.69
5 $ 14,230.38
6 $ 18,178.02
7 $ 20,359.39 $ 2,240.00
8 $ 22,802.51 $ 4,748.80
9 $ 25,538.81 $ 7,558.66
10 $ 28,603.47 $ 10,705.69
15 $ 50,409.09 $ 33,097.47
20 $ 88,838.04 $ 72,559.43
25 $156,562.98 $142,104.88
30 $275,917.47 $264,667.74
35 $486,260.86 $480,665.37

At the end of 35 years even though Jack only contribute $12K he still has ~$6K more than Jill does even though she contributed $58K over the 35 years!  Imagine what would happen if Jack continued contributing over the whole 35 year period!  If he would have contributed throughout the whole 35 years he would have ~$1.085 million dollars while contributing only $70K throughout that time and the rest would be all interest!  Crazy, isn’t it?  The interest ratio is 14.5, meaning for every dollar Jack invested, he earned $14.50 in interest!

Hopefully, now you know why we recommend starting to invest as soon as possible, when you are financially able to.  If you do not have 35 years to invest, do not worry, you still have time.  It is never too late to start.  If you are looking for ways to figure out how to have extra money to invest, please contact us today and we would love to discuss it with you.

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