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| Forumla for Compound Interest |
Simply put, compound interest is when your principal investment earns interest and from that moment on, you earn interest on the principal and all prior accrued interest.
Let's take a look at some real numbers to help you understand the importance of compounding interest and why it may well be your most valuable tool in saving for retirement.
Below, I am comparing Person 1 vs. Person 2, the age and length of when they invest and how much each person will have at retirement.
As you can see, if Person 1 only invests from 18 years of age to 28 (10 years) AND STOPS, Person 1 will have $90,711 more compared to Person 2 who starts investing from 29 years of age to 65 (36 years). Eventhough Person 2 has invested 3.5 x's longer. This is the POWER OF COMPOUNDING INTEREST!
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| The Power of Compounding Interest
So, as you can see from the illustration above, the sooner you start saving, the more you'll have for retirement.
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Charlie -- You might want to check your formulas there. For person 1, year 2 would be interest on 1,080 plus 1000 plus interest on that amount or $2,246. At the end, Person 1 has $310,027 and Person 2 has $219,316 and your point definitely still stands!
ReplyDeleteThank you, Anonymous, for catching that error! I have fixed the chart and now this post has a happier ending as both, Person 1 and Person 2 ends up with more money thus emphasizing even more, the power of compounding interest!
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