Did you realize that millionaire status is achievable for nearly all Americans? While most people think of celebrities or business owners as the only professions within reach of a million dollars, the truth is that most people, through budgeting and monthly automatic investments, can achieve that goal by the age of retirement. The trick is untapping the power of compound interest.
So, what exactly is compound interest? Well, say I invest $500 per month. At the end of one year, I would have invested $6,000 in total. If, for example, I received a 10% return on that investment ($600) then my hypothetical new total would be $6,600. But in year 2, I don’t just have another $6,000. Instead, my 10% return would be based on $6,000 + $6,600, coming out to $1,260. So compound interest is the interest that my interest earns. In this case, my interest from the previous year ($600 that my investments earned) began to also earn interest in addition to my direct contributions.
Now, earning $60 additional from year 1 to year 2 isn’t really a significant amount of money, let’s be honest. However, that amount of additional interest snowballs bigger every year. In fact, if you were to hypothetically maintain a 10% return consistently every year then after 7 years you would begin to make the same amount in monthly interest that you contribute each month!
Using the same model, over the course of 30 years, your hypothetical nest egg could reach $1,039,000!
What does all this mean? At a steady 10% return your money would double approximately every 7 years. So, waiting to begin contributing to your retirement until you’re at a place where you feel comfortable squirreling away a few hundred dollars a month is costing you double-ups…. which translates to more years you have to work to reach your retirement goal.
*Want to learn more on compound interest? Investopedia – Compound Interest