Monday, July 30, 2007

Using Compound Interest to Your Own Advantage

Last time, we explored the topic of compound interest.


How can we use the power of compounding to our own advantage? By saving for the retirement as early as possible.

The answer seems simple but I know many people who would consider it to be absurd: “I mean, come on, who would think about retirement at such a young age, in the 20’s?”


Biz Girls, you would!


The following example shows how essential time is for money growth. We have 2 biz girls, Allison and Barbara:

Biz Girl Allison:
Allison started saving $100/month in an aggressive investment account since she was 20 years old. She stopped saving money at age 45.

Biz Girl Barbara:
Barbara started saving $100/month at age 25 in a similar investment account and continued until she was 65 years old.

Who will end up with more money at age 65?


The most obvious answer would be Barbara, since she invested $100/month for 40 years while Allison only invested the same amount for 20 years. Not really!!!


By age 45, Allison accumulated $108,000. If she keeps this money growing for the next 20 years at, say, 8% per year, she will end up with $503,383 at age 65!
By age 45, Barbara would have accumulated $66,000. Even if she keeps adding $100/month for another 20 years, she will only end up with $385,000 at age 65.
Allison had around $40,000 more than Barbara at the same age. So even if Allison stopped saving, she ended up having more money than Barbara when they both retire.


Now you can see how time is such a major factor in money growth.


Try it yourself with this calculator!


What can we learn from this lesson? Start saving for the future as early as possible!!!


Now that you have seen the example above, I feel that you’ll be more open to discuss retirement plans! So look out for the future entry about "401K: the 'Must Have' Retirement Account".

In the meanwhile check out the next entry about "Rise and Shine: How to Get Ready in 30 Minutes."


xoxo
The Biz Girl

11 comments:

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