Magic of Compound Interest – Chart Explained

Many of us aware of Power of Compounding but it is always good to keep reminding often so we can save more on time to reap the rewards of the magic. This single chart will help you visualize how early start can be really advantages.

Susan (grey) invests $5,000 per year from age 25 to 35 ($50,000 over 10 years) and stops.
Bill (green) invests $5,000 per year from ages 35 to 65 ($150,000 over 30 years).
Chris (blue) invests $5,000 per year from ages 25 to 65 ($200,000 over 40 years).

You’ll note that Susan still ends up with more money than Bill, even though he invests three times as much money over 30 years, all because Bill starts late. Susan and Chris start out the same, except that Susan stops after 10 years while Chris keeps going. Chris only invests $150,000 more than Susan, but ends up with $500,000 more money in the end. A 7% annual return is assumed.

Investors should make saving for retirement a priority by saving early, saving often and investing more of what they save. By starting to save at later ages, investors miss out on the benefits of compounding, and could end up with a smaller retirement account. That’s the great benefit of compounding.

Don’t forget the Rule of 72 which quickly tells you how many you need to double your money. The rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. For example, if you want to know how long it will take to double your money at eight percent interest, divide 8 into 72 and get 9 years.

Happy Saving….

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