Compound interest is your greatest ally or your greatest enemy to financial independence.
Being a part of Gen Y, you have the ability to let the power of compound interest give you the financial freedom you deserve. On the other hand, you will be making quite a few decisions now and in the near future, that will allow you to fight compound interest your whole life.
Below, I provided six examples of how compound interest really works. Followed by 5 lessons that you should take from this data. Study the following charts like your life depended on it.
- 10% average annual return
- Invest $5,000 a year until 60 years old
Table # 1 – Starting at 25 VS. Starting at 30
This table shows the difference from someone who started investing $5,000 a year through the ages of 25 and 30.
Table # 2 – Saving $2,000 a Year Starting at 18 VS. $5,000 a Year at 30
|$2,000 @ 18||$5,000 @ 30|
This tables shows the difference between someone who starts saving just $2,000 a year at 18 and $5,000 a year at 30.
Table # 3 – Saving $4,000 a Year Starting at 22 VS. $5,000 a Year at 25
|$4,000 @ 22||$5,000 @ 25|
This table shows the difference between someone who saves at 22 (generally first year out of college) and someone who waits until they are 25.
Table # 4 – Earning 9% Return VS. 10% Return, Starting at Age 25
This table shows the difference between someone who earns 9% and 10%, if they started investing $5,000 at age 25.
Table # 5 – Saving $5,000 a Year Starting at 30 VS. $5,000 a Year Starting at 35
This table shows the difference between someone saving $5,000 a year starting at age 30 and $5,000 a year starting at age 35.
Table # 6 – The True Cost of the Minimum Payment
|Credit Card Balance||Interest Rate||Minimum Payment||Interest Paid||Months Until Paid Off|
The calculation shows what making the a $100 monthly payment, on a $5,000 credit card balance with an 18% interest rate really costs you. Plus, the amount of time it takes to actually pay it off.
5 Lessons on the Power of Compound Interest
- Start investing as soon as you can. Even if it’s just a small amount a year. Don’t worry if you can’t invest 10% of your income today. Start with just 1% this month and work your way up in 1% increments until you reach 10%.
- The earlier you start, the less you have to save. Which is very nice because it’s only going to get harder to start saving. In other words, don’t wait to your income goes up to start saving. Get used to living on spending less than you earn today.
- The “little” stuff adds up to big stuff. Watch investment expenses, rebalance if you need to, and pay attention to taxes. This can easily earn you an extra 1% over your lifetime.
- 30 is the cutoff debt. Your goal should be to get out of debt and beginning to save aggressively by 30.
- Get out of debt as fast as you can. The greatest mathematical discovery of all time can also work against you.
Decide today if you want to let the power of compound interest be your ally or enemy.
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