Effects of Compound Interest

The effects of compound interest can take your finances to levels that you wouldn’t even imagine. I cannot stress enough how important it is to start investing ASAP so that compound interest can start working its magic. Simple interest works like this: If I invest $100 and get a 6% return, I will have $106 at the end of the year. Compound interest says that in year two, my 6% return will be on $106, rather than just the original $100. So at the end of year 2, I would have a total of $112.36 rather than $112. This may not seem like much of a difference right now, but on a┬álarger scale and with more time, it will make a huge difference.

Effects of Compound Interest

Scenario 1

In this scenario, we are making a one-time investment of $10,000 at the designated age in the table. This money is growing at the annual rate of 6%. We are planning on retiring at the age of 65, which is when it will stop collecting interest. Notice how much of a difference 5 years makes. If you invest this money at 20 instead of 25, 5 years will make you almost $40,000 more!

Started Investing at age: 20 25 30 35 40 45 50
Value at 65 147,799.63 109,574.54 81,235.51 60,225.75 44,649.70 33,102.04 24,540.94

Scenario 2

In this scenario, we are making monthly investments of $458.33 (the monthly contribution needed to max out your Roth IRA). Again, the money is growing at a 6% annual rate and we are retiring at the age of 65. When taking this approach, starting at 20 as opposed to 25 will result in $300,000 more!

Started Investing at age: 20 25 30 35 40 45 50
Value at 65 1,263,154.09 912,759.95 652,987.47 460,399.38 317,619.92 211,767.20 133,290.94

We can come up with millions of scenarios but you can see the point, taking advantage of compound interest and time can work wonders. So start investing NOW, so that you can take advantage of this free money.

2 thoughts on “Effects of Compound Interest

  1. Lori Martin says:

    My question would be. Where can I find a investment vehicle that offers a 6% annual interest rate? If you know of any would you please share.

    Thank you,
    Lori Martin

    • daseanjd says:

      Hi Lori,

      Sadly, you won’t be able to find an investment vehicle that will guarantee you a 6% annual return. However, investing in the stock market long-term will likely produce similar returns if you build your portfolio the right way. If you look at my “Investing Tips” post I talk about investing in index funds that mimic the performances of major indexes. Doing this will help you earn the returns that you want. Also, keep in mind that stock prices fluctuate a lot. However, they will generally increase in the long-run. This is why I emphasize long-term investing (10+ years). If you follow these tips, your returns will not disappoint. But if this isn’t the answer that you are looking for, please keep asking questions! I want to help as much as I can.

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