As Einstein said, “Compound interest is the most powerful force in the universe.” Unfortunately most people don’t harness it’s power. The greatest power of compound interest is time. As the proverb says, “the best time to plant a tree is 20 years ago, the 2nd best time is now.”
For example, imagine you’re a bright young 23 year old recent college graduate starting out in your new career. Imagine that you decide that with all your new found wealth you will start putting $3,000 in your retirement plan each year until you retire at 63. Over that timeframe you would have invested $123,000, not bad. However, invested at an average rate of return of 7% you would be sitting on approximately $690,000 at 63, that’s a little over five and a half times the amount that you invested.
Now, imagine that you’re a little older. You haven’t started saving for retirement yet and in a panic decide that NOW is the time. In order to earn the same $690,000 by age 63 can you guess how much you have to save each year? Approximately $14,500! Maybe it’s easier to save more later in life, but overall you will have to save roughly $300,000, vs. $123,000 if you started saving $3,000 per year 20 years earlier.
This isn’t shocking news to most people. However, most people are also on the other side of the compound interest equation, paying others compound interest on credit cards and car loans, rather than saving and benefiting from their own compound growth. The bottom line is that you need to stop putting off saving as so many people are. If you didn’t plant your tree 20 years ago then the second best time is now, whenever now is. If your a young adult, anything that you can save now will payoff many times over later in life.
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