An Example of the Power of Compound Interest

I've noted a few times before that I love, love, love compound interest (see The Richest Man in Babylon, The Power of Compounding and How to Retire Rich: Use the Power of Compounding.) I've been saving/investing for years now and am just starting to see a good amount of growth as my money starts earning money itself. And the best is yet to come!!!!!!!

To illustrate how much of an impact compound interest can have on a person's net worth, here's an example from the book The Net Worth Workout: A Powerful Program for a Lifetime of Financial Fitness (see my rating for details):

Say that, starting in 1960, your mom put $1,000 a year into the S&P 500 for the next forty-four years. With its average rate of return of 10 percent, she'd have had $717,905 in 2004. Investing that $44,000 over those forty-four years delivered substantial returns. What's especially striking about Mom's happy outcome, though, is its growth curve. At her twenty-two-year mark in 1982, your mom's then-$22,000 investment would have been worth just over $78,000 -- a tidy $56,000 profit. Not bad, grant you.

But the real magic would have occurred in the next twenty-two years. Grand finale: Mom's $78,542, plus her annual $1,000 addition, would have ballooned. Think of it: She added the same $22,000 but her account grew from $78,542 to $717,905. The magic of compounding created almost $640,000 more during the same amount of time!

Now that's what I'm talking about!!!! I can't wait until I have enough stored away that my money itself (without additional investment from me) is growing at $50,000 a year or more. Won't that be cool?

Comments

[Suze]

Good points all.

BTW, did you read Robert Kiyosaki's Yahoo Finance column today? Here is the link:

http://finance.yahoo.com/expert/article/richricher/30687?count=30&start=96#dtk-cmtscnt

I honestly hope people don't believe everything they read. So much bad financial advice out there. People should read FMF instead.

[Q at $1 Million to My Name]

This example is what makes those first twenty two years so painful. It seems like you're just making no progress, while you watch the rich take their money and make piles and piles more money.

But the key for young investors is to consistently save! When you're young, think in percentage terms instead of dollar terms. If you're 21, and you turn $10,000 into $20,000 in one year, you got a measly $10,000 increase in your net worth, right? Well, you have a 100% increase! That is awesome!

That's why the experts constantly pound the drum of saving - save anything you can, because eventually it adds up.

[Margo]

I couldn't figure out how I grew my net worth by $12K in just 6 months. I'm young and I don't make *that* much money! However, I've been fully funding my Roth IRA since graduation in 2004 and contributing to the 401k to get my company's match. It's gotten to the point that I'm starting to see the growth make a whole lot more difference. As much as 1/3 of my monthly NW increases come from investment gains.

My <3 goes out to whomever first conceived compound interest!!!

my mom didn't earn 1000 to invest in early 1967.... The money value was a lot higher then so there where no money left to save 1000 its definitively easier to save 10.000 today. This is the biggest wrong with the compound sagas that goes around ....